UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


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ILLUSTRATIVE  CASES 


ON 


PRIVATE 
CORPORATIONS 


BY 

CHARLES  B.  ELLIOTT.  Ph.  D.,  LL.  D. 

Formerly  Justice  of  the  Supreme  Court  of  Minnesota  and  later  Justice  of 

the  Supreme  Court  of  the  Philippines,  Member  of  the  Philippine 

Commission  and  Secretary  of  Commerce  and  Police 


REVISED  AND   ENLARGED   BY 

L  MAURICE  WORMSER,  A.  B.,  LL.  B. 

Of  the  New  York  Bar 
Professor  of  Law,  Fordham  University 


INDIANAPOLIS 

THE  BOBBS-MERRILL  COMPANY 

PUBLISHERS 


EL  5*^3 p - 
i1 1^ 


Copyright  1914 

BY 

THE  BOBBS-MERRILL  COMPANY. 


PREFATORY  NOTE  TO  THE 
SECOND  EDITION. 

It  is  now  almost  a  score  of  years  since  the  collection  of  cases  on 
the  Law  of  Private  Corporations  by  Judge  Elliott  first  appeared. 
Their  purpose  was  to  accompany  and  illustrate  his  textbook.  The 
text  has  been  revised  periodically  and  is  now  in  its  fourth  edition.  The 
collection  of  cases  illustrated  the  text  so  adequately  that  hitherto  it  has 
remained  untouched.  During  the  past  few  years  the  developments 
in  the  subject  have  been  so  fundamental,  however,  that  a  new  edition 
of  the  cases  seemed  imperative.  The  present  editor  has  endeavored 
to  supply  the  want.  The  following  topics,  in  particular,  have  needed 
and  received  additional  emphasis:  The  Conception  of  Corporate 
Entity  and  Personality,  Ultra  Vires  Acts,  Corporate  Liability  for 
Torts  and  Crimes,  Foreign  Corporations,  Rights  of  Stockholders, 
especially  with  regard  to  Minority  Stockholders'  Suits,  and  Manage- 
ment of  Corporations.  No  attempt  at  elaborate  annotation  has 
been  made,  for  the  reason  that  the  cases  are  designed  primarily  to 
supplement  the  text.  Yet,  whenever  deemed  useful,  brief  references 
and  comments  have  been  inserted. 

The  editor  is  deeply  indebted  to  his  wife,  and  to  his  friend,  Pro- 
fessor Robert  D.  Petty  of  the  New  York  Law  School,  for  valuable 
suggestions  and  helpful  criticism.  L  Maurice  Wormser. 

Fordham  University  Law  School,  New  York  City. 


TABLE  OF  CONTENTS. 


CHAPTER  I. 


Definition  and  Classification.  Page 

—  Thomas  v.  Dakin,  22  Wend.  (N.  Y.)  9 2 

Williamson's  Syndics  v.  Smoot,  7  Martin  (La.)  31 6 

— Button  V.  Hoffman,  61  Wis.  20 6 

— State  V.  Standard  Oil  Co.,  49  Ohio  St.  137 10 

Donovan  v.  Purtell,  216  111.  629 17 

-"Liverpool  Ins.  Co.  v.  Massachusetts,  10  Wall.  (U.  S.)  566 23 

—People  ex  rel.  Winchester  v.  Coleman,  133  N.  Y.  279 28 

V CHAPTER  II. 

The  Creation,  Personality  and  Citizenship  of  Corporations. 

—  State  V.  Dawson,  16  Ind.  40 33 

^ — Franklin  Bridge  Co.  v.  Wood,  14  Ga.  80 35 

^     Butler  Paper  Co.  v.  Cleveland,  220  111.  128 39 

Willmott  v.  London  Road  Car  Co.,  L.  R.  (1910)  2  Ch.  Div.  525 43 

Louisville  etc.  R.  Co.  v.  Letson,  2  How.  (U.  S.)  497 • 47 

^CHAPTER  III. 

Promoters. 

McArthur  v.  Times  Printing  Co.,  48  Minn.  319 5^ 

\/ — -Pittsburg  Mining  Co.  v.  Spooner,  74  Wis.  307 53 

X  CHAPTER  IV. 

Corporations  Existing  Without  Legal  Right. 
Sec.  I.     The  De  Facto  Doctrine. 

Stout  V.  Zulick,  48  N.  J.  L.  599 ^5 

Finnegan  v.  Knights  of  Labor,  52  Minn.  239 08 

iJC^  >7 Society  Perun  v.  Cleveland,  43  Ohio  St.  481 71 

"^"  Sec.  2.     Estoppel  to  Deny  Corporate  Existence. 

. — •  Foster  v.  Moulton,  35  Minn.  458 80 

Jones  V.  Cincinnati  Type  Foundry  Co.,  14  Ind.  89 82 

CHAPTER  V. 


X 


The  Corporation  and  the  State. 

_,_^  _      Dartmouth  College  v.  Woodward,  4  Wheat.  (U.  S.)  518 84 

/^  r         Stone  V.  Mississippi,  loi  U.  S.  814 100 

Beer  Co.  v.  Massachusetts,  97  U.  S.  25 I04 

Looker  v.  Maynard,  179  U.  S.  46 108 

CHAPTER  VL 

Powers. 

Downing  v.  Mt.  Washington  Road  Co.,  40  N.  H.  230 113 

People  ex  rel.  Tiffanv  v.  Campbell,  144  N.  Y.  166 .....  .^ 1 16 

Quackenboss  v.  Globe  &  Rutgers  Fire  Ins.  Co.,  177  N.  Y.  71 120 

Jacksonville  &c.  R.  &c.  Co.  v.  Hooper,  160  U.  S.  514 •  - 1 

V 


vi  TABLE   OF   CONTENTS. 

Page 

NicoU  V.  New  York  &  E.  R.  Co.,  12  N.  Y.  121 125 

Bradbury  v.  Boston  Canoe  Club,  153  Mass.  77 129 

Monument  Nat.  Bk.  v.  Globe  Works,  loi  Mass.  57 130 

Jones  V.  Guarantee  &c.  Co.,  loi  U.  S.  622 132 

Railroad  Co.  v.  Marseilles,  84  111.  643 135 

0  K    Coppin  V.  Greenless  &c.  Co.,  38  Ohio  St.  275 I37 

A  y     Franklin  Bk.  v.  Commercial  Bk.,  36  Ohio  St.  350 140 

/^      Easun  v.  Buckeye  Brew.  Co.,  51  Fed.  156 I43 

CHAPTER  VII. 

The  Doctrine  of  Ultra  Vires  and  its  Application. 

Jemison  v.  Citizens  Sav.  Bk.,  122  N.  Y.  135 146 

Bath  Gas  Light  Co.  v.  Claffy,  151  N.  Y.  24 148 

Central  Transp.  Co.  v.  Pullman's  Palace  Car  Co.,  139  U.  S.  24 154 

Pullman's  Palace  Car  Co.  v.  Central  Transp.  Co.,  171  U.  S.  138 159 

Kerfoot  v.  Farmer's  &c.  Bk.,  218  U.  S.  281 165 

Hubbard  v.  Worcester  Art  Museum,  194  Mass.  280 167 

(Note.— Contra,  Matter  of  McGraw,  in  N.  Y.  66.) 

CHAPTER  VIII. 

Liability  for  Torts  and  Crimes. 

Chestnut  Hill  &c.  Turnpike  Co.  v.  Rutter,  4  Serg.  &  R.  (Pa.)  6 174 

Goodspeed  v.  East  Haddam  Bank,  22  Conn.  530 175 

Nims  V.  Mt.  Hermon  Boys'  School,  160  Mass.  177 182 

Hannon  v.  Siegel-Cooper  Co.,  167  N.  Y.  244 186 

United  States  v.  John  Kelso  Co.,  86  Fed.  304 '188 

People  V.  Rochester  R.  &c.  Co.,  195  N.  Y.  102 191 


CHAPTER  IX. 

Extraterritorial  Powers  of  Corporations— State  Control  Over  Foreign 
Corporations. 

Merrick  v.  Van  Santvoord,  34  N.  Y.  208 195 

Paul  V.  State  of  Virginia,  8  Wall.  (U.  S.)  168 205 

-Barrow  Steamship  Co.  v.  Kane,  170  U.  S.  100 212 

Penn.  Collieries  Co.  v.  McKeever,  183  N.  Y.  98 218 

CHAPTER  X. 

Capital  Stock:    Herein  Also  of  the  Rights  of  Creditors. 

Burall  V.  Bushwick  R.  Co.,  75  N.  Y.  211 222 

/^  Cook  V.  City  of  Burlington,  59  Iowa  251 227 

v-!^ --People  ex  rel.  Union  Trust  Co.  v.  Coleman,  126  N.  Y.  433 229 

Sawyer  v.  Hoag,  17  Wall.  (U.  S.)  610 234 

Hospes  V.  Northwestern  Mfg.  &  Car  Co.,  48  Mmn.  174 239 

CHAPTER  XL 
Stock  Subscriptions. 

Brvant's  Pond  Steam-Mill  Co.  v.  Felt,  87  Me.  234 248 

Norwich  Lock  Mfg.  Co.  v.  Hockaday,  89  Va.  557 249 

California  Southern  Hotel  Co.  v.  Callendcr,  94  Cal.  120 254 

Minneapolis  Thresh.  Mach.  Co.  v.  Davis,  40  Minn,  no 259 

CHAPTER  XII. 
The  Rights  of  Membership. 

Venner  v.  Chicago  C.  R.  Co.,  246  111.  170 264 

(Matter  of  Steinway,  159  N.  Y.  250,  note.) 


TABLE  OF   CONTENTS.  Vll 

Page 

Stokes  V.  Continental  Trust  Co.,  i86  N.  Y.  285 266 

King  V.  Paterson  &c.  R.  Co.,  29  N.  J.  L.  504 278 

Hawes  v.  Oakland,  104  U.  S.  450 281 

(Note. — New  Fed.  Eq.  Rule  No.  27.) 

Rabe  v.  Dunlap,  51  N.  J.  Eq.  40 289 

Continental  Securities  Co.  v.  Belmont,  206  N.  Y.  7 295 

CHAPTER  XIII. 
Transfer  of  Shares. 

Lund  V.  Wheaton  Roller  Mill  Co.,  50  Minn.  36 304 

East  Birmingham  Land  Co.  v.  Dennis,  85  Ala.  565 306 

McNeil  V.  Tenth  Nat.  Bk.,  46  N.  Y.  325 309 

CHAPTER  XIV. 

Corporate  Meetings  and  Elections. 

Northwestern  Transp.  Co.  v.  Beatty,  1887,  L.  R.  12  App.  Cas.  589 318 

Bjorngaard  v.  Goodhue  County  Bk.,  59  Minn.  483 325 

Pierce  v.  Commonwealth,  104  Pa.  St.  150 327 

CHAPTER  XV. 

Directors,  Officers  and  Agents — The  Management  of  Corporations. 

Chicago  R.  Co.  v.  Allerton,  18  Wall.  (U.  S.)  233 332 

North  Hudson  Mut.  B.  &  L.  Association  v.  Childs,  82  Wis.  460 334 

Hun  V.  Cary,  82  N.  Y.  65 344 

Twin-Lick  Oil  Co.  v.  Marbury,  91  U.  S.  587 352 

CHAPTER  XVI. 

The  Common-Law  Liability  of  Stockholders. 

Handley  v.  Stutz,  139  U.  S.  417 35^ 

Coit  V.  Gold  Amal.  Co.,  1 19  U.  S.  343 366 

Southworth  v.  Morgan,  205  N.  Y.  293 3^9 

CHAPTER  XVII. 

The  Constitutional  and  Statutory  Liability  of  Stockholders. 

First  Nat.  Bk.  v.  Gustin  &c.  Min.  Co.,  42  Minn.  327 374 

Umsted  v.  Buskirk,  17  Ohio  St.  113 379 

Huntington  v.  Attrill,  146  U.  S.  657 381 

CHAPTER  XVIII. 

Insolvency  and  Dissolution. 

Boston  Glass  Manufactory  v.  Langdon,  24  Pick.  (Mass.)  49 391 

Tomlinson  v.  Bricklayer's  Union,  87  Ind.  308 394 

State  V.  Minnesota  Thresher  Mfg.  Co.,  40  Minn.  213 397 

New  York  &  Long  Island  Bridge  Co.  v.  Smith,  148  N.  Y.  540 4*"»3 

Wilson  V.  Leary,  120  N.  Car.  90 404 


ILLUSTRATIVE    CASES 

ON 

PRIVATE    CORPORATIONS 


CHAPTER  I. 

DEFINITION     AND     CLASSIFICATION. 

Co.  Lit.  250  a.  "Bodies  politike,  &c.  Tliis  is  a  body  to  take  in 
succession,  framed  (as  to  that  capacity)  by  policie,  and  thereupon 
it  is  called  here  by  Littleton  a  body  politike ;  and  it  is  also  called  a 
corporation,  or  a  body  incorporate,  because  the  persons  are  made 
into  a  body,  and  are  of  capacity  to  take  and  grant,  &c.  *  *  * 
Every  body  politike,  or  corporate  is  either  ecclesiasticall  or  lay. 

*  *  *  And  again  it  is  either  sole,  or  aggregate  of  many.  And 
this  body  politike,  or  corporate,  aggregate  of  many,  is  by  the 
civilians  called  collegium  or  universitas." 

I  Bl.  Com.,  467-8.  "But  as  all  personal  rights  die  with  the  person ; 
and,  as  the  necessary  forms  of  investing  a  series  of  individuals,  one 
after  another,  with  the  same  identical  rights,  would  be  very  incon- 
venient, if  not  impracticable ;  it  has  been  found  necessary,  when  it  is 
for  the  advantage  of  the  public  to  have  any  particular  rights  kept  on 
foot  and  continued,  to  constitute  artificial  persons,  who  may  main- 
tain a  perpetual  succession,  and  enjoy  a  kind  of  legal  immortality. 

These  artificial  persons  are  called  bodies  politic,  bodies  corporate, 
{corpora  corporata),  or  corporations:  of  which  there  is  a  great  va- 
riety subsisting,  for  the  advancement  of  religion,  of  learning,  and 
of  commerce;  in  order  to  preserve  entire  and  forever  those  rights 
and  immunities,  which,  if  they  were  granted  only  to  those  individu- 
als of  which  the  body  corporate  is  composed,  would  upon  their  death 
be  utterly  lost  and  extinct.  *  *  *  When  they  are  consolidated 
and  united  into  a  corporation,  they  and  their  successors  are  then 
considered  as  one  person  in  law :  as  one  person,  they  have  one  will, 
which  is  collected  from  the  sense  of  the  majority  of  individuals: 

*  *  *  The  privileges  and  immunities,  the  estates  and  possession, 
of  the  corporation,  when  once  vested  in  them,  will  be  forever  vested, 
without  any  new  conveyance  to  new  succession ;  for  all  the  individ- 
ual members  that  have  existed  from  the  foundation  to  the  present 
time,  or  that  shall  ever  hereafter  exist,  are  but  one  person  in  law,  a 
person  that  never  dies :  in  like  manner  as  the  river  Thames  is  still 
the  same  river,  though  the  parts  which  compose  it  are  changing 
every  instant." 

1 — Private  Corp.  I 


2  DEFINITION    AND    CLASSIFICATION. 

THOMAS  V.   DAKIN.^ 

1839.     22  Wend.   (N.  Y.)  9. 

Nature  of  a  Corporation. 

NELSON,  C.  J. :  This  is  an  action  brought  by  the  plaintiff,  as 
president  of  the  Bank  of  Central  New  York,  an  association  formed 
under  what  is  familiarly  known  as  the  General  Banking  Law, 
passed  April  18,  1838,  to  recover  several  demands  due  the  institu- 
tion. 

The  defendant  has  demurred  to  the  declaration,  and  urges  the 
unconstitutionality  of  the  law,  by  way  of  defense;  and  it  is  in- 
sisted, in  his  behalf:  i.  That  the  associations  formed  under 
this  law  are  corporations ;  and  2.  That  a  general  law  authoriz- 
ing the  creation  of  these  bodies  is  inconsistent  with  the  ninth  sec- 
tion of  the  seventh  article  of  the  Constitution.  On  the  part  of 
the  plaintiffs,  it  is  urged  in  reply:  i.  That  the  associations  are 
not  .corporations :  2.  That  if  they  be,  the  act  authorizing  them 
niMvbe  passed  by  a  majority  bill;  and  3.  If  within  the  ninth  sec- 
tiol^  still  the  law  may  be  passed  by  two-thirds  of  the  members 
elected. 

L  Are  these  associations  corporations  ?  In  order  to  determine 
this  question,  we  must  first  ascertain  the  properties  essential  to 
constitute  a  corporate  body,  and  compare  them  with  those  con- 
ferred upon  the  asociations ;  for  if  they  exist  in  common,  or  sub- 
sjtantially  correspond,  the  answer  will  be  in  the  afifirmative.  A 
c^orporate  body  is  known  to  the  law  by  the  powers  and  faculties 
bestowed  upon  it,  expressly  or  impliedly,  by  the  charter;  the  use 
of  the  term  "corporation"  in  its  creation  is  of  itself  unimport- 
ant, except  as  it  will  imply  the  possession  of  these.  They  may 
be  expressly  conferred,  and  then  they  denote  this  legal  being  as 
unerringly  as  if  created  in  general  terms.  It  has  been  well  said 
by  learned  expounders,  that  a  corporation  aggregate  is  an  arti- 
ficial body  of  men,  composed  of  divers  individuals,  the  ligaments 
of  which  body  are  the  franchises  and  liberties  bestowed  upon  it, 
which  bind  and  unite  all  into  one,  and  in  which  consists  the  whole 
frame  and  essence  of  the  corporation. 

The  "franchises  and  liberties,"  or,  in  modern  language,  and 
as  more  strictly  applicable  to  private  corporations,  the  powers 
and  faculties,  which  are  usually  specified  as  creating  corporate 
existence,  are:  i.  The  capacity  of  perpetual  succession;  2.  The 
power  to  sue  and  be  sued,  and  to  grant  and  receive,  in  its  cor- 
porate name ;  3.  To  purchase  and  hold  real  and  personal  estate ; 
4.  To  have  a  common  seal;  and  5.  To  make  by-laws.  These 
indicia  were  given  by  judges  and  elementary  writers   at  a  very 

*  See  also  as  to  the  nature  of  corporations,  Warner  v.  Beers,  23  Wend. 
(N.  Y.)  103  (1840);  The  Conservators  of  the  River  Tone  v.  Ash,  10 
Barn.   &   Cress,  349    (1829).— Ed. 


THOMAS   V.   DAKIN.  3 

early  day ;  since  which  time  the  institutions  have  greatly  multi- 
plied, their  practical  operation  and  use  have  been  thoroughly 
tested,  and  their  peculiar  and  essential  properties  much  better  un- 
derstood. Any  one  comprehending  the  scope  and  purpose  of  them, 
at  this  day,  will  not  fail  to  perceive  that  some  of  the  powers  above 
specified  are  of  trifling  importance,  while  others  are  wholly  unes- 
sential. For  instance,  the  power  to  purchase  and  hold  real  es- 
tate is  not  otherwise  essential  than  to  afford  a  place  of  business  ; 
and  the  right  to  use  a  common  seal,  or  to  make  by-laws,  may  be 
dispensed  with  altogether.  For  as  to  the  one,  it  is  now  well  set- 
tled that  corporations  may  contract  by  resolution,  or  through 
agents,  without  seal ;  and  as  to  the  other,  the  power  is  unneces- 
sary in  all  cases  where  the  charter  sufficiently  provides  for  the 
government  of  the  body.  The  distinguishing  feature,  far  above 
all  others,  is  the  capacity  conferred,  by  which  a  perpetual  suc- 
cession of  different  persons  shall  be  regarded  in  the  law  as  one 
and  the  same  body,  and  may  at  all  times  act,  in  fulfilment  of  the 
objects  of  the  association,  as  a  single  individual.  In  this  way,  a 
legal  existence,  a  body  corporate,  an  artificial  being,  is  constituted, 
the  creation  of  which  enables  any  number  of  persons  to  be  con- 
cerned in  accomplishing  a  particular  object,  as  one  man.  While 
the  aggregate  means  and  influence  of  all  are  wielded  in  effect- 
ing it.  the  operation  is  conducted  with  the  simplicity  and  indi- 
viduality of  a  natural  person.  In  this  consists  the  essence  and 
great  value  of  these  institutions.  Hence  it  is  apparent  that  the 
only  properties  that  can  be  regarded  strictly  as  essential  are  those 
which  are  indispensable  to  mould  the  different  persons  into  this 
artificial  being,  and  thereby  enable  it  to  act  in  the  way  above 
stated.  When  once  constituted,  this  legal  being  created,  the 
powers  and  faculties  that  may  be  conferred  are  various. — limited 
or  enlarged,  at  the  discretion  of  the  legislature,  and  will  depend 
upon  the  nature  and  object  of  the  institution,  which  is  as  compe- 
tent as  a  natural  person  to  receive  and  enjoy  them.  We  may.  in 
short,  conclude  by  saying,  with  the  most  approved  authorities  at 
this  day,  that  the  essence  of  a  corporation  consists  in  a  capacity : 
I.  To  have  a  perpetual  succession  under  a  special  name  and  in 
an  artificial  form ;  2.  To  take  and  grant  property,  contract  ob- 
ligations, sue  and  be  sued  by  its  corporate  name  as  an  individual ; 
and  3.  To  receive  and  enjoy  in  common,  grants  of  privileges  and 
immunities. 

We  will  now  endeavor  to  ascertain  with  exactness,  the  powers 
and  attributes  conferred  upon  these  associations  by  virtue  of  the 
statute.  The  first  fourteen  sections  (i  to  14)  prescribed  the 
duties  of  the  comptroller  in  furnishing  notes  for  circulation,  tak- 
ing the  required  securities,  etc.  The  15th  provides,  that  any 
number  of  persons  may  associate  to  establish  offices  of  discount, 
deposit,  and  circulation.  The  i6th.  that  they  shall  make  and 
file  a  certificate,  specifying:  i.  The  name  to  be  used  in  the  busi- 
ness ;  2.   The  place   where  the  business   shall   be   carried   on ;    3. 


4  DEFINITION    AND    CLASSIFICATION. 

The  amount  of  capital  stock,  and  number  of  shares  into  which 
divided;  4.  The  names  of  the  shareholders;  5.  The  duration  of 
the  association.     The   i8th  confers  upon  the  persons  thus  asso- 
ciating the  most   ample  powers   for  carrying  on  banking   opera- 
tions, together  with  the  right  "to  exercise  such  incidental  powers 
as  shall  be  necessary  to  carry  on  such  business;"  also  to  choose 
a  president,   vice-president,   cashier,   and   such   other   officers   and 
a^^ents  as  may  be  necessary.     By  the  21st  and  22d  sections,  con- 
tracts, notes,  bills,  etc.,  shall  be  signed  by  the  president  and  cashier ; 
and  all  suits,  actions,  etc.,  are  to  be  brought  in  the  name  of,  and 
also  against  the  president  for  the  time  being;  and  not  to  abate 
by  his  death,  resignation,  or  removal,  but  to  be  continued  in  the 
name  of  the  successor.     24th  section:     The  association  may  pur- 
chase and  hold  real  estate,  etc.,  the  conveyance  to  be  made  to  the 
president,  or  such  other  officer  as  shall  be  designated,  who  may 
sell  and  convey  the  same  free  from  any  claim  against  sharehold- 
ers.     19th   section:     The   shares   of  capital   stock   to  be   deemed 
personal  property,  transferable  on  the  books  of  the  association; 
and  every  person  becoming  a  shareholder  by  such  transfer  shall 
succeed  to  all  the  rights  and  liabilities  of  the  prior  holder.     23d 
section:     No  shareholder  to  be  personally  liable;  and  the  associa- 
tion is  not  to  be  dissolved  by  the  death  or  insanity  of  any  share- 
holder. 

I.  Upon  a  perusal  of  these  provisions,  it  will  appear  that  the 
association  acquires  the  power  to  raise  and  hold  for  common  iise 
any  given  amount  of  capital  stock  for  banking  purposes,  which, 
when  subscribed,  is  made  personal  property,  and  the  several  shares 
transferable  the  same  and  with  like  effect  as  in  case  of  corporate 
stock;  to  assume  a  common  name  under  which  to  manage  all  the 
affairs  of  the  association;  to  choose  all  officers  and  agents  that 
may  be  necessary  for  the  purpose,  and  remove  and  appoint  them 
at  pleasure.  It  will  hence  be  seen,  that  although  the  association 
may  be  composed  of  a  number  of  different  persons,  holding  an 
interest  in  the  capital  stock,  its  operations  are  so  arranged  that 
they  do  not  appear  in  conducting  its  affairs ;  all  are  so  bound  to- 
gether, so  moulded  into  one,  as  to  constitute  but  a  single  body, 
represented  by  a  common  name,  or  names  (the  knot  of  the  com- 
bination), and  in  which  all  the  business  of  the  institution  is  con- 
ducted by  common  agents.  In  this  way  it  purchases  and  holds 
real  and  personal  property,  contracts  obligations,  discounts  bills, 
notes,  and  other  evidences  of  debt,  receives  deposits,  buys  gold 
and  silver  bullion,  bills  of  exchange,  etc.,  loans  money,  sues  and 
is  sued,  etc.  It  is  true,  some  portion  of  the  business  is  conducted 
in  the  assumed  name,  and  some  in  the  name  of  the  president  for 
the  time  being;  but  this  in  no  manner  changes  the  character  of 
the  body.  A  corporation  may  have  more  than  one  name ;  it  rnay 
have  one  in  which  to  contract,  grant,  etc.,  and  another  in  which 
to  sue  and  be  sued;  so  it  may  be  known  by  two  different  names, 
and  may  sue  and  be  sued  in  either;  and  the  name  of  the  presi- 


THOMAS  V.   DAKIN.  5 

dent,  his  official  name,  or  any  other,  will  answer  every  purpose 
(2  Bacon's  Abr.  5;  2  Salk.  451;  2  id.  257;  Ld.  Raym.  153,  680). 
The  only  material  circumstance  is  a  name,  or  names,  of  some 
kind,  in  which  all  the  affairs  of  the  company  may  be  conducted. 
So  much,  and  no  more,  is  essential  to  give  simplicity  and  effect 
to  the  operation.  An  artificial  being  is  thus  plainly  created,  capa- 
ble of  receiving  all  the  ample  powers  and  privileges  conferred 
upon  the  associations,  and  of  managing  their  diversified  concerns 
in  an  individual  capacity.  All  business  is  to  be  conducted  in  a 
common  or  proper  name. 

2.  This  artificial  being  possesses  the  powers  of  perpetual  suc- 
cession. Neither  sale  or  shares,  nor  death  of  shareholders,  af- 
fects it;  if  one  should  sell  his  interest  or  die,  the  purchaser  or 
representative,  by  operation  of  law,  immediately  takes  his  place. 
§  19.  Nor  can  the  insanity  of  a  member  work  a  dissolution.  Id. 
Officers  and  agents  for  conducting  the  business  of  the  associa- 
tion are  secure.  In  case  of  vacancy,  by  death  or  otherwise,  the 
place  may  at  once  be  filled.  §  18.  For  the  entire  duration,  there- 
fore, of  the  association,  and  which  may  be  without  limit,  §  16, 
sub.  5,  the  whole  body  of  shareholders,  though  perpetually  shift- 
ing, constitute  the  same  uniform,  artificial  being  which  is  to  be 
engaged  through  the  instrumentality  of  officers  and  agents  in 
conducting  the  business  of  the  concern,  and  no  member  is  person- 
ally liable.  §  2^.  Then,  as  to  the  powers  conferred,  without 
again  specially  recurring  to  them,  it  will  be  seen  at  once  that  the 
associations  possess  all  that  are  deemed  essential  according  to 
the  most  approved  authorities,  to  constitute  a  corporate  body. 
They  have  a  capacity:  i.  To  have  perpetual  succession  under  a 
common  name  and  in  an  artificial  form ;  2.  To  take  and  grant 
property,  contract  obligations,  to  sue  and  be  sued  by  its  corpor- 
ate name,  in  the  same  manner  as  an  individual ;  3.  To  receive 
grants  of  privileges  and  immunities,  and  to  enjoy  them  in  com- 
mon. All  these  are  expressly  granted,  and  many  more,  besides 
the  general  sweeping  clause,  "to  exercise  such  incidental  powers 
as  shall  be  necessary  to  carry  on  such  business"  (meaning  the 
business  of  banking),  under  which  even  the  seal  and  right  to  make 
by-laws  are  clearly  embraced,  if  essential  in  conducting  the  affairs 
of  the  institution.     *     *     *     * 

Upon  the  whole,  I  am  of  the  opinion,  i.  That  these  associa- 
tions are  corporations ;  2.  That  the  legislature  possesses  no  power 
to  pass  a  general  law  like  the  one  under  consideration,  by  a  ma- 
jority bill ;  and  3.  That  they  may  pass  it  by  two-thirds  of  the 
members  elected. 

The  plaintiff  is,  therefore,  entitled  to  judgment  on  the  demurrer, 
with  leave  to  amend  on  the  usual  terms. 


6  DEFINITION    AND    CLASSIFICATION. 

WILLIAMSON'S   SYNDICS  v.   SMOOT. 
1819.     7  Martin  O.  S.   (La.)   31,   12  Am.  Dec.  494. 
Corporation  as  Entity — Distinct  from  Stockholders. 

MATHEWS,  J.:  The  plaintiffs  having  caused  an  attachment  to 
be  levied  on  the  steamboat  Alabama,  the  St.  Stephens  Steamboat 
Company  intervened  in  their  corporate  capacity,  and  claimed  her 
as  their  property.  The  intervening  party  are  a  body  politic, 
created  by  an  act  of  the  legislature  of  the  territory  of  Alabama, 
the  capital  stock  of  which  is  divided  into  shares  of  a  certain 
amount,  and  Smoot,  the  defendant,  owns  ten  of  them,  subscribed 
for  by  him. 

The  questions  to  be  decided  are:  *  *  *  2.  Can  the  shares 
of  stock  of  any  individual  stockholder  be  legally  attached?    *    *    * 

II.  The  existence  of  the  claimants  being  recognized  as  a  body 
corporate,  and  it  being  admitted  that  the  boat  attached  belongs 
to  them  as  a  part  of  their  common  stock,  it  is  clear  that  Smoot 
does  not  possess  such  certain  and  distinct  individual  property  in  it 
as  to  make  his  interest  attachable.  The  estate  and  rights  of  a 
corporation  belong  so  completely  to  the  body  that  none  of  the 
individuals  who  compose  it  has  any  right  of  ownership  in  them, 
nor  can  dispose  of  any  part  of  them  (Civ.  Code,  88,  art.   11). 

The  court  is  of  opinion  that  the  district  court  erred  in  disal- 
lowing the  claim  of  the  company. 

It  is,  therefore,  ordered,  adjudged  and  decreed  that  the  judg- 
ment be  annulled,  avoided  and  reversed,  and  that  the  attachment 
of  the  plaintiff  and  appellant  be  quashed,  so  far  as  it  relates  to 
the  said  steamboat,  the  Alabama,  and  that  she  be  released 
therefrom.^ 


BUTTON   v.   HOFFMAN.^ 

1884.     C)i   Wis.  20,  20  N.  W.  667,  50  Am.  Rep.   131. 

Nature  of  a   Corporation — Title  of  Property  in   Corporation — 

Corporation  Sole. 

ORTON,  J. :  This  is  an  action  of  replevin  in  which  the  title  of 
the  plaintiff  to  the  property  was  put  in  issue  by  the  answer.     In 

^Statutes  ordinarily  provide  today  a  method  wherebj^  a  creditor  can 
levy  on  his  debtor's  shares  in  a  corporation. — Ed. 

^  See  Wheelock  v.  Moulton,  15  Vt.  519  (1843);  Newton  Manufacturing 
Co.  V.  White,  42  Ga.  148;  Winona,  etc..  R.  Co.  v.  St. 'Paul,  etc.,  R.  Co., 
23  Minn.  359;  Kinp  v.  Barnes,  109  N.  Y.  267;  Saranac  &  L.  P.  R.  Co.  v. 
Arnold,  167  N.  Y.  368,  60  N.  E.  647;  Palmer  v.  RinR,  113  App.  Div. 
(N.  Y.)  643,  99  N.  Y.  S.  290;  Parker  v.  Bethel  Hotel  Co.,  96  Tenn.  252, 
34  S.  W.  209.  31  L.  R.  A.  706. 

But  cf.  Swift  v.  Smith,  65  Md.  428,  5  Atl.  534,  57  Am.  Rep.  336.— Ed. 


BUTTON    V.    HOFFMAN.  7 

his  instructions  to  the  jury  the  learned  judge  of  the  circuit  court 
said:  "I  think  the  testimony  is  that  the  plaintiff  had  the  title  to 
the  property."  The  evidence  of  the  plaintiff's  title  was  that  the 
property  belonged  to  a  corporation  known  as  "The  Hayden  & 
Smith  Manufacturing  Company,''  and  that  he  purchased  and  be- 
came the  sole  owner  of  all  of  the  capital  stock  of  said  corporation. 
As  the  plaintiff  in  his  testimony  expressed  it,  "I  bought  all  the 
stock.  I  own  all  the  stock  now.  I  became  the  absolute  owner  of 
the  mill.  It  belonged  at  that  time  to  the  company,  and  I  am  the 
company."  There  was  no  other  evidence  of  the  condition  of  the 
corporation  at  the  time.  Is  this  sufficient  evidence  of  the  plain- 
tiff's title?  We  think  not.  The  learned  counsel  of  the  respondent 
in  his  brief  says:  "The  property  had  formerly  belonged  to  the 
Hayden  &  Smith  Manufacturing'  Company,  but  the  respondent 
had'  purchased  and  become  the  owner  of  all  the  stock  of  the  com- 
pany, and  thus  became  its  sole  owner." 

From  the  very  nature  of  a  private  business  corporation,  or.  in- 
deed, of  any  corporation,  the  stockholders  are  not  the  private  and 
joint  owners  of  its  property.  The  corporation  is  the  real,  though 
artificial,  person  substituted  for  the  natural  persons  who  procured 
its  creation,  and  have  pecuniary  interests  in  it,  in  which  all  its 
property  is  vested,  and  by  which  it  is  controlled,  managed  and 
disposed  of.  It  must  purchase,  hold,  grant,  sell,  and  convey  the 
corporate  property,  and  do  business,  sue  and  be  sued,  plead  and 
be  impleaded,  for  corporate  purposes,  by  its  corporate  name.  The 
corporation  must  do  its  business  in  a  certain  w^ay.  and  by  its  reg- 
ularly »appointed  officers  and  agents,  whose  acts  are  those  of  the 
corporation  only  as  they  are  within  the  powers  and  purposes  of 
the  corporation.  In  an  ordinary  copartnership  the  members  of 
it  act  as  natural  persons  and  as  agents  for  each  other,  and  with 
unlimited  liability.  But  not  so  with  a  corporation  :  its  members, 
as  natural  persons,  are  merged  in  the  corporate  identity.  Ang. 
&  A.  Corp.  §§  40,  46.  100,  591.  595.  A  share  of  the  capital  stock 
of  a  corporation  is  defined  to  be  a  right  to  partake,  according  to 
the  amount  subscribed,  of  the  surplus  profits  obtained  from  the 
use  and  disposal  of  the  capital  stock  of  the  company  to  those  pur- 
poses for  which  the  company  is  constituted.  Id.  §  557.  The  cor- 
poration is  the  trustee  for  the  management  of  the  property,  and 
the  stockholders  are  the  mere  cestui  que  trust.  Gray  v.  Portland 
Bank,   3   Mass.    365 ;   Eidman   v.    Bow^man,   4   Amer.    Corp.    Cas. 

350-        ...  .  .     .      , 

The  right  of  alienation  or  assignment  of  the  property  is  m  tlie 

corporation  alone,  and  this  right  is  not  affected  by  making  the 
stockholders  individually  liable  for  the  corporate  debts.  Ang.  & 
A.  Corp.,  §  191:  Pope  V.  Brandon.  2  Stew.  (Ala.)  401 ;  Whitwell 
v.  Warner,  20  Vt.  444.  The  property  of  the  corporation  is  the 
mere  instrument  whereby  the  stock  is  made  to  produce  the  profits, 
w^hich  are  the  dividends  to  be  declared  from  time  to  time  by  cor- 
porate  authority    for   the   benefit   of   the   stockholders,   while   the 


8  DEFINITION    AND    CLASSIFICATION. 

property  itself,  which  produces  them,  continues  to  belong  to  the 
corporation.  Bradley  v.  Holdsworth,  3  Mees.  &  W.  422;  Wal- 
tham  Bank  v.  Waltham,  10  Mete.  334;  Tippets  v.  Walker,  4 
Mass.  595.  The  corporation  holds  its  property  only  for  the  pur- 
poses for  which  it  was  permitted  to  acquire  it,  and  even  the  cor- 
poration cannot  divert  it  from  such  use,  and  a  shareholder  has  no 
right  to  it,  or  the  profits  arising  therefrom,  until  a  lawful  division 
is  made  by  the  directors  or  other  proper  officers  of  the  corpora- 
tion, or  by  judicial  determination.  Ang.  &  A.  Corp.,  §§  160,  190, 
557;  Hyatt  v.  Allen,  4  Amer.  Corp.  Cas.  624.  A  conveyance  of 
all  the  capital  stock  to  a  purchaser  gives  to  such  purchaser  only 
an  equitable  interest  in  the  property  to  carry  on  business  under 
the  act  of  incorporation  and  in  the  corporate  name,  and  the  cor- 
poration is  still  the  legal  owner  of  the  same.  Wilde  v.  Jenkins,  4 
Paige,  481.  A  legal  distribution  of  the  property  after  a  dissolu- 
tion of  the  corporation  and  settlement  of  its  affairs,  is  the  incep- 
tion of  any  title  of  a  stockholder  to  it,  although  he  be  the  sole 
stockholder.     Ang.  &  A.  Corp.,  §  779a. 

These  general  principles  sufficiently  establish  the  doctrine  that 
the  owner  of  all  the  capital  stock  of  a  corporation  does  not,  there- 
fore, own  its  property,  or  any  of  it,  and  does  not  himself  become 
the  corporation,  as  a  natural  person,  to  own  its  property,  and  do 
its  business  in  his  own  name.  While  the  corporation  exists  he  is  a 
mere  stockholder  of  it,  and  nothing  else.  The  consequences  of  a 
violation  of  these  principles  would  be  that  the  stockholders  would 
be  the  private  and  joint  owners  of  the  corporate  property,  and 
they  could  assume  the  powers  of  the  corporation,  and  supersede 
its  functions  in  its  use  and  disposition  for  their  own  benefit  with- 
out personal  liability,  and  thus  destroy  the  corporation,  termi- 
nate its  business,  and  defraud  its  creditors.  The  stockholders 
would  be  the  owners  of  the  property,  and,  at  the  same  time,  it 
would  belong  to  the  corporation.  One  stockholder  owning  the 
whole  capital  stock  could,  of  course,  do  what  several  stockhold- 
ers could  lawfully  do.  It  is  said  in  City  of  Utica  v.  Churchhill,  33 
N.  Y.  161,  "the  interest  of  a  stockholder  is  of  a  collateral  nature, 
and  is  not  the  interest  of  an  owner;"  and  in  Hyatt  v.  Allen,  su- 
pra, that  "a  shareholder  in  a  corporation  has  no  legal  title  to  its 
property  or  profits  until  a  division  is  made."  In  Winona  & 
St.  P.  Railroad  Co.  v.  St.  Paul  S.  C.  Railroad  Co.,  23  Minn. 
359,  it  is  held  that  the  corporation  is  still  the  absolute  owner, 
and  vested  with  the  legal  title  of  the  property,  and  the  real 
party  in  interest,  although  another  party  has  become  the  owner 
of  the  sole  beneficial  interests  in  its  rights,  property,  and  im- 
munities. In  Baldwin  v.  Canfield,  26  Minn.  43,  S.  C.  i  N.  W. 
Rep.  261,  it  was  held  that  the  sole  owner  of  the  stock  did  not 
own  the  land  of  the  corporation  so  as  to  convey  the  same.  In 
Bartlett  v.  Brickett,  14  Allen  (Mass.).  62,  an  action  of  replevin 
was  brought  by  A.  B.,-  and  C,  as  the  "trustees  of  the  Ministerial 
Fund  in  the  North  Parish  in  Haverhill,"  which  was  the  corporate 


BUTTON    V.    HOFFMAN,  9 

name.  In  portions  of  the  writ  the  plaintiffs  were  referred  to  as 
"the  said  trustees"  and  "the  said  plaintiffs."  In  the  bond,  "A., 
B.,  and  C,  trustees  as  aforesaid,"  became  bound,  and  the  officer, 
in  his  return,  certified  that  he  had  taken  a  bond  "from  the  within 
named  A..  B.,  and  C,"  and  the  property  was  receipted  by  "A., 
B.,  and  C,  plaintiffs."  It  was  held  that  the  action  was  not  by 
the  corporation,  as  it  should  have  been,  and  judgment  was  ren- 
dered for  the  defendant.  It  is  said  in  Van  Allen  v.  Assessors,  3 
Wall.  584.  "the  corporation  is  the  legal  owner  of  all  the  property 
of  the  bank,  both  real  and  personal."  In  Wilde  v.  Jenkins,  supra, 
where  a  copartnership  bought  all  the  property  and  eft'ects,  to- 
gether with  the  franchises,  of  a  corporation,  and  elected  them- 
selves trustees  of  the  corporation,  it  was  held  that  the  corpora- 
tion was  not  dissolved,  and  that  the  legal  title  to  the_  real  and 
personal  property  was  still  in  the  corporation  for  their  benefit. 
In  Mickles  v.  Bank.  11  Paige,  118,  it  was  held  that,  although  a 
corporation  was  deemed  to  have  surrendered  its  charter  for  non- 
user,  it  was  not  dissolved,  and  would  not  until  its  dissolution 
was  judicially  declared,  and  that  until  then  its  property  could  be 
taken  and  sold  by  its  judgment  creditors.  In  Bennett  v.  American 
Art  Union,  5  Sandf.  Super.  Ct.  614,  it  was  held  that,  "as  a  gen- 
eral rule,  the  whole  title,  legal  and  equitable  (to  its  property),  is 
vested  in  the  corporation  itself,"  and  that  the  individual  members 
have  no  other  or  greater  interest  in  it  than  is  expressly  given  to 
them  by  the  charter,  and  the  prayer  of  the  complainant,  as  a. 
shareholder  in  the  art  union,  for  an  injunction  against  a  certain 
disposition  of  its  property,  was  denied,  because  it  had  no  interest 
in  it.     See,  also,  Goodwin  v.  Hardy,  57  ^le.  143. 

It  is  true  that  none  of  the  above  cases  are  precisely  parallel  with 
the  present  case  in  facts,  but  they  are  sufficiently  analogous  to  be 
authority  upon  the  principle  that  the  plaintiff,  as  the  sole  stock- 
holder of  the  corporation,  is  not  the  legal  owner  of  its  property. 
He  may  have  an  equitable  interest  in  it.  but  in  this  action  he  must 
show  a  legal  title  to  the  property  in  himself  in  order  to  recover, 
and  he  has  shown  that  such  title  is  in  another  person.  Timp  v. 
Dockham,  32  Wis.  146:  Sensenbrenner  v.  ]Mathews,  48  Wis.  250; 
S.  C.  3  N.  W.  Rep.  599.  In  analogy  to  the  above  principle  it  was 
held  in  Murphy  v.  Hanrahan.  50  VVis.  485.  S.  C.  7  N.  W.  Rep. 
436,  that  the  sole  heirs  of  an  estate  did  not  have  such  a  legal  title 
to  a  promissory  note  given  to  their  father  as  would  entitle  them 
to  sue  the  maker  upon  it.  because  the  title  to  it  was  in  the  admin- 
istrator, and  they  could  obtain  the  title  only  by  administration 
and 'distribution  according  to  law.  The  heirs  in  that  case  cer- 
tainly had  as  much  equitable  interest  in  that  note  as  this  plaintiff 
has  in  the  property  in  controversy.  The  want  of  title  to  the  prop- 
erty being  fatal  to  the  plaintiff's  recovery  in  the  action  between 
the  present  parties,   other  alleged   errors  will  not  be  considered. 

The  judgment  of  the  Circuit  Court  is  reversed,  and  the  cause 
remanded  for  a  new  trial. 


10  DEFINITION    AND    CLASSIFICATION. 

STATE   V.    STANDARD    OIL    CO. 

1892.     49  Ohio  St.  137,  30  N.  E.  279,  15  L.  R.  A.  145,  34  Am. 

St.  541. 

Disregard  of  Entity  Doctrine. 

This  is  an  application  by  the  state  for  a  writ  of  quo  warranto 
against  the  Standard  Oil  Company,  a  corporation  organized  under 
the  laws  of  the  State  of  Ohio  to  oust  it  of  the  right  to  be  a  cor- 
poration on  the  ground  that  it  has  abused  its  corporate  franchises 
by  becoming  a  party  to  an  agreement  that  is  against  public  policy. 
Demurrer  to  the  answer. 

MINSHALL,  J. :  *  *  *  It  will  be  observed  on  reading  the 
answer  that  while  the  defendant  denies  that  it  "entered  into  or 
become  a  party  to  either  or  both  of  the  agreements  in  said  peti- 
tion set  forth"  and  also  "denies  that  it  has  at  any  time  or  in  any 
manner  acquiesced  therein  or  observed,  performed,  or  carried  out 
either  or  both  of  said  agreements,"  it  does  not  deny  the  averment 
of  the  petition  that  "all  of  the  owners  and  holders  of  its  capital 
stock,  including  all  the  officers  and  directors  of  said  company, 
signed  said  agreements."  Nor  could  it  have  been  the  intention  to 
do  so,  as  the  answer  proceeds  to  admit  "that  it  [the  corporation] 
is  informed  and  believes  that  the  individuals  named  in  the  agree- 
ment, being  the  same  individuals  who  executed"  it,  "did  enter 
into  the  agreements  set  forth"  in  the  petition ;  claiming  "that 
said  agreements  were  agreements  of  individuals  in  their  indi- 
vidual capacity  and  with  reference  to  their  individual  property, 
and  were  not,  nor  were  they  designed  to  be,  corporate  agree- 
ments." The  claim  is  based  upon  the  argument  that  the  corpor- 
ation is  a  legal  entity,  separate  from  its  stockholders;  that  in  it 
are  vested  all  the  property  and  powers  of  the  company,  and  can 
only  be  affected  by  such  acts  and  agreements  as  are  done  or  exe- 
cuted on  its  behalf  by  its  corporate  agencies,  acting  within  the 
legitimate  scope  of  their  powers;  that  its  stockholders  are  not  the 
corporation ;  that  their  shares  are  their  individual  property,  and 
that  they  may  each  and  all  dispose  of  and  make  such  agreements 
affecting  their  shares  as  best  suits  their  private  interests ;  and  that 
no  such  acts  and  agreements  of  stockholders,  subservient  of  their 
private  interests,  can  be  ascribed  to  the  company  as  a  separate 
entity,  though  done  and  concurred  in  by  each  and  all  of  its  stock- 
holders. The  general  proposition  that  a  corporation  is  to  be 
regarded  as  a  legal  entity,  existing  separate  and  apart  from  the 
natural  persons  composing  it.  is  not  disputed ;  but  that  the  state- 
ment is  a  mere  fiction,  existing  only  in  idea,  is  well  understood, 
and  not  controverted  by  any  one  who  pretends  to  accurate  knowl- 
edge on  the  subject.  It  has  been  introduced  for  the  convenience 
of  the  company   in  making  contracts,   in   acquiring  property   for 


STATE   V.   STANDARD  OIL   CO.  II 

corporate  purposes,  in  suing  and  being  sued,  and  to  preserve  the 
limited  liability  of  the  stockholders  by  distinguishing  between 
the  corporate  debts  and  property  of  the  company  and  of  the 
stockholders  in  their  capacity  as  individuals.  All  fictions  of  law 
have  been  introduced  for  the  purpose  of  convenience,  and  to  sub- 
serve the  ends  of  justice.  It  is  in  this  sense  that  the  maxim  in 
fictione  juris  subsistit  aequitas  is  used,  and  the  doctrine  of  fictions 
applied.  But  when  they  are  urged  to  an  intent  and  purpose  not 
within  the  reason  and  policy  of  the  fiction,  they  have  always  been 
disregarded  by  the  courts.  Broom,  Leg.  Max.  130.  "It  is  a  cer- 
tain rule,"  says  Lord  Mansfield,  C.  ].,  "that  a  fiction  of  law-  shall 
never  be  contradicted  so  as  to  defeat  the  end  for  which  it  was 
invented,  but  for  every  other  purpose  it  may  be  contradicted." 
Johnson  v.  Smith,  2  Burrows,  962.  "They  were  invented."  says 
BrinkerhofT,  J.,  in  Wood  v.  Ferguson,  7  Ohio  St.  291,  "for  the 
advancement  of  justice,  and  wall  be  applied  for  no  other  purpose." 
And  it  is  in  this  sense  that  they  have  been  constantly  understood 
and  applied  in  this  state.  Hood  v.  Brown,  2  Ohio  R.  269;  Rose- 
man  V.  McFarland,  9  Ohio  St.  381 ;  Collards'  Admr.  v.  Donald- 
son,  17  Ohio  R.  266. 

No  reason  is  perceived  why  the  principles  applicable  to  fictions 
in  general  should  not  apply  to  the  fiction  "that  a  corporation  is 
a  personal  entity,  separate  from  the  natural  persons  who  com- 
pose it,  and  for  whose  benefit  it  has  been  invented."  One  author 
seems  to  think  that  it  has  outlived  its  usefulness ;  that  it  is  "a 
stumbling  block  in  the  advance  of  corporation  law  towards  the 
discrimination  of  the  real  rights  of  actual  men  and  women,"  and 
should  be  abandoned.  Taylor  Corp.,  §  51.  Among  the  many  at- 
tempts that  have  been  made  to  define  the  nature  of  a  corporation, 
that  given  by  !Mr.  Kyd,  discarding,  or  at  least  not  adopting,  the 
metaphysical  distinction  of  a  legal  entity  separate  from  the  per- 
sons comprising  it,  is  certainly  the  most  practical,  presenting,  as  it 
does,  the  real  nature  of  a  corporation  as  seen  in  its  constituents, 
and  in  the  manner  that  it  is  formed  and  transacts  its  business. 
His  definition  is :  "A  collection  of  many  individuals  united  into 
one  body,  under  a  special  denomination,  having  perpetual  succes- 
sion under  an  artificial  form,  and  vested  by  the  policy  of  the  law 
with  the  capacity  of  acting  in  several  respects  as  an  individual, 
particularly  of  taking  and  granting  property,  of  contracting 
obligations,  and  of  suing  and  being  sued,  of  enjoying  privileges 
and  immunities  in  common,  and  of  exercising  a  variety  of  politi- 
cal rights  more  or  less  extensive  according  to  the  design  of  its 
institution  or  the  powers  conferred  upon  it,  either  at  the  time  of 
its  creation  or  any  subsequent  period  of  its  existence."  i  Kyd. 
Corp.  13.  In  brief,  then,  a  corporation  is  a  collection  of  many 
individuals,  united  in  one  body  under  a  special  denomination,  and 
vested  by  the  policy  of  the  law  with  the  capacity  of  acting  in 
several  respects  as  an  individual.  "The  statement,"  says  Mr. 
Morawetz,    "that    a   corporation    is    an    artificial    person   or    entity 


12  DEFINITION    AND    CLASSIFICATION. 

apart  from  its  members,  is  merely  a  description,  in  figurative 
language,  of  a  corporation  viewed  as  a  collective  body.  A  cor- 
poration is  really  an  association  of  persons,  and  no  judicial 
dictum  or  legislative  enactment  can  alter  this  fact."  See  his 
work  on  Corporations,  §  227.  So  that  the  idea  that  a  corporation 
may  be  a  separate  entity,  in  the  sense  that  it  can  act  indepen- 
dently of  the  natural  persons  composing  it,  or  abstain  from  act- 
ing, where  it  is  their  will  that  it  shall,  has  no  foundation  in  rea- 
son or  authority,  is  contrary  to  the  fact,  and  to  base  an  argument 
upon  it,  when  the  question  is  as  to  whether  a  certain  act  was 
the  act  of  the  corporation  or  of  its  stockholders,  cannot  be 
decisive  of  the  question,  and  is  therefore  illogical;  for  it  may  as 
likely  lead  to  a  false  as  to  a  true  result. 

Now,  so  long  as  a  proper  use  is  made  of  the  fiction  that  a 
corporation  is  an  entity  apart  from  its  shareholders,  it  is  harmless, 
and,  because  convenient,  should  not  be  called  in  question;  but 
where  it  is  urged  to  an  end  subversive  of  its  policy,  or  such  is  the 
issue,  the  fiction  must  be  ignored,  and  the  question  determined 
whether  the  act  in  question,  though  done  by  shareholders, — that 
is  to  say,  by  the  persons  uniting  in  one  body, — was  done  simply 
as  individuals,  and  with  respect  to  their  individual  interests  as 
shareholders,  or  was  done  ostensibly  as  such,  but,  as  a  matter  of 
fact,  to  control  the  corporation,  and  affect  the  transaction  of  its 
business,  in  the  same  manner  as  if  the  act  had  been  clothed  with 
all  the  formalities  of  a  corporate  act.  This  must  be  so,  because, 
the  stockholders  having  a  dual  capacity,  and  capable  of  acting  in 
either,  and  a  possible  interest  to  conceal  their  character  when 
acting  in  their  corporate  capacity,  the  absence  of  the  formal  evi- 
dence of  the  character  of  the  act  cannot  preclude  judicial  inquiry 
on  the  subject.  If  it  were  otherwise,  then  in  one  department  of 
the  law  fraud  would  enjoy  an  immunity  awarded  to  it  in  no 
other. 

Therefore  the  real  question  we  are  now  to  determine  is  whether 
it  appears  from  the  face  of  the  pleadings,  giving  effect  to  all  the 
denials  of  fact  contained  in  the  answer,  that  the  execution  of  the 
agreement  set  forth  in  the  petition  should  be  imputed  to  the  asso- 
ciation of  persons  constituting  the  Standard  Oil  Company  of 
Ohio,  acting  in  their  corporate  capacity.  The  agreement  pro- 
vides, in  the  first  place,  that  the  parties  to  it  shall  be  divided  into 
three  classes,  the  first  class  to  embrace  all  the  stockholders  and 
members  of  certain  corporations  and  limited  partnerships,  the 
defendant,  the  Standard  Oil  Company  of  Ohio,  being  one.  It  is 
then  covenanted  by  the  parties  that  as  soon  as  practicable  a 
corporation  shall  be  formed  in  each  of  certain  states,  under  the 
laws  thereof  (Ohio  being  one),  to  mine  for,  produce,  manufac- 
ture, refine,  and  deal  in  petroleum  and  all  its  products,  with  the 
proviso,  however,  that,  instead  of  organizing  a  new  corporation, 
any  existing  one  "may  be  used  for  the  purpose  when  it  can 
advantageously  be  done,"  and  in  Ohio  the  defendant  has  been  so 


STATE  V.   STANDARD   OIL   CO.  13 

used.  In  a  subsequent  part  of  the  agreement  nine  trustees  are 
selected,  their  powers  and  duties  are  defined,  and  provision  made 
for  the  selection  of  their  successors.  As  will  hereafter  appear,  it 
is  made  the  duty  of  the  parties  to  the  agreement  to  transfer  their 
stocks  or  interests  in  their  respective  companies  or  firms  to  these 
trustees  who  hold  the  same  in  trust,  but  with  the  power  to  vote 
on  the  same  as  though  the  real  owners;  in  consideration  of  which 
trust  certificates  are  issued  to  the  owners,  who.  as  the  owners  of 
such  certificates,  elect  the  successors  of  the  trustees.  It  is  then 
provided  that  all  the  property,  assets,  and  business  of  the  corpo- 
rations and  limited  partnerships  embraced  in  the  first  class  "shall 
be  transferred  to  and  vested  in  the  said  several  Standard  Oil 
Companies."  And  in  order  to  accomplish  this  purpose  it  is  pro- 
vided that  "the  directors  and  managers  of  each  and  all_  of  the 
several  corporations  and  limited  partnership  mentioned  in  class 
first  are  hereby  authorized  and  directed  by  the  stockholders  and 
members  thereof  (all  of  them  being  parties  to  this  agreement) 
to  sell,  assign,  transfer,  convey  and  make  over,  for  the  consid- 
eration hereinafter  mentioned,  to  the  Standard  Oil  Company  or 
companies  of  the  proper  state  or  states,  as  soon  as  said  corpora- 
tions are  organized  and  ready  to  receive  the  same,  all  the  prop- 
erty, real  and  personal,  assets,  and  business  of  said  corporations 
and  limited  partnerships." 

Now,  in  the  case  of  the  defendant  it  will  be  observed,  that  this 
contemplated,  and  could  not  have  been  accomplished,  without  cor- 
porate action.     The  Standard  Oil  Company  of  Ohio  w'as  required 
to  transfer  all  its  property,  assets,   and  business  to  a  new  com- 
pany, to  be  organized  in  the  state ;  and  this  was  to  be  accom- 
plished  by    the    obligation    imposed    on    its    members    and    stock- 
holders, all  of  whom  are  parties  to  the  agreement,  to  authorize 
and    require   the    directors    and    managers    to    make   the    transfer. 
The  property  and  assets  of  the  corporation  could  only  be  trans- 
ferred by  a  corporate  act,  and  the  agreement  could  not.  in  this 
respect,  be  carried  into  eftect.  other  than  by  such  corporate  act, 
and  clearly  indicates  that  the  purpose  of  the  stockholders  of  the 
defendant  in  becoming  a  party  to  it  was  to  aflfect  their  property 
and  business  as  a  corporation ;  in  other  w^ords,  was  to  act  in  their 
corporate,  and  not  in  their  individual  capacity.     The  subsequent 
agreement    of   January   4,    1882,    does    not   materially    change   the 
original  agreement  in  this  regard.    Reciting  that  "it  is  not  deemed 
expedient    that    all    of    the    companies    and    associations    should 
transfer  their  property  to  the  said  Standard  Oil  Companies  at  the 
present  time."  and  "that  it  is  deemed  advisable  that  a  discretion- 
ary power  should  be  vested  in  the  trustees  as  to  when  such  trans- 
fer" should  be  made,  it  provides  that,  "until  said  trustees  should 
so  decide,  each  of  said  companies  shall  remain  in  existence  and 
retain  its  property  and  business ;  and  the  trustees  shall  hold  the 
stock  thereof  in  trust  as  in  said  agreement  provided."     So  that, 
under  the  agreement  as  modified,  the  directors  and  managers  of 


14  DEFINITION    AND    CLASSIFICATION. 

the  defendant  may  be  required  by  its  stockholders  and  members, 
all  of  whom  are  parties  to  the  agreement,  to  make  the  transfer  of 
the  property  and  business  of  the  defendant  whenever  the  trustees 
may,  in  their  discretion,  direct.  The  effectiveness  of  this  pro- 
vision to  secure  all  intended  by  it  may  be  better  understood  by 
observing  that  "the  directors  and  managers,"  "the  stockholders 
and  members,"  and  "the  trustees"  here  mentioned  are  substan- 
tially the  same  persons,  occupying  these  different  relations  at 
one  and  the  same  time.  It  signifies  nothing  that  the  transfer 
here  provided  for  has  not,  as  respects  the  defendant,  been 
made.  It  does  not  change  the  evidence  it  affords  of  the  purpose 
and  object  of  the  members  of  the  corporation  in  becoming  parties 
to  the  agreement. 

Again,  the  agreement,  as  performed  by  the  members  of  the 
defendant,  as  effectually  places  the  property  and  business  of  the 
defendant  under  the  control  and  management  of  the  Standard  Oil 
Trust  as  if  the  same  had  been  transferred  as  provided  in  the  orig- 
inal agreement.  It  is  averred  in  the  petition,  and  not  denied  in 
the  answer,  "that  prior  to  the  dates  of  the  trust  agreements 
aforesaid  defendant's  capital  stock  consisted  of  35,000  shares  of 
$100  each,  and  upon  the  signing  of  said  agreements  in  the  man- 
ner aforesaid  34,993  shares  of  said  stock,  belonging  to  the  per- 
sons who  signed  the  agreements  in  manner  above  set  forth  (in 
what  proportions,  however,  plaintiff  is  unable  to  state),  were 
transferred,  by  defendants  transferring  officers  upon  defendant's 
stock-books,  to  the  certain  nine  trustees  who  were  appointed  and 
named  in  the  first  one  of  said  trust  agreements,  upon  the  request 
of  the  respective  owners  of  said  shares,  and  in  pursuance  of  the 
provisions  of  said  trust  agreements;  the  remaining  seven  of  said 
shares  of  stock  being  retained  by  or  transferred  to  the  directors 
of  defendant  company.  That  at  the  time  said  transfer  of  stock 
was  made  there  were  seven  directors  of  defendant,  and  each  one 
of  the  seven  held  one  share  of  the  stock  aforesaid,  but  the  num- 
ber of  said  directors  was  thereafter  reduced  to  five,  who  still  hold 
and  vote  said  seven  shares  of  stock,  and  no  more.  That  in  lieu 
of  the  transfer  of  said  34,993  shares,  as  aforesaid,  to  the  nine 
trustees  above  mentioned,  an  equal  amount,  in  par  value,  of  cer- 
tificates of_  the  Standard  Oil  Trust,  which  were  provided  for  and 
described  in  said  trust  agreements,  was  issued  and  delivered  bv 
said  nine  trustees  to  the  persons  aforesaid,  from  whom  said  nine 
trustees  had  received  said  34,993  shares  of  stock  in  defendant 
company.  That  the  capital  stock  of  said  defendant  company  is 
still  $3,500,000,  and  the  nine  trustees  before  mentioned  still  hold 
and  control  the  34.993  shares  thereof  which  were  transferred  to 
them  as  above  stated."  So  that  all  but  seven  of  the  35,000  shares 
of  the  defendant's  capital  stock  has  been  transferred  by  the 
owners,  who  are  parties  to  the  agreement,  to  the  trustees  of  the 
Standard  Oil  Trust,  and  continue  to  be  held  in  trust,  as  appears 
by  the  supplemental  agreement  the  transferrers   receiving  in  lieu 


STATE  V.    STANDARD   OIL    CO.  1 5 

thereof  trust  certificates  equal  at  par  value  to  the  par  value  of  the 
stock  received.  The  control  which  this  gives  and  was  intended  to 
give  over  the  business  of  the  defendant  appears  from  the  follow- 
ing provision  contained  in  the  trust  agreement :  "It  shall  be  the 
duty  of  said  trustees  to  exercise  general  supervision  over  the 
affairs  of  said  several  Standard  Oil  Companies,  and  as  far  as 
practicable  over  the  other  companies  or  partnerships  any  portion 
of  whose  stock  is  held  in  said  trust.  It  shall  be  their  duty,  as 
stockholders  of  said  companies,  to  elect  as  directors  and  officers 
thereof  faithful  and  competent  men.  They  may  elect  themselves 
to  such  positions  when  they  see  fit  so  to  do,  and  shall  endeavor 
to  have  the  aflfairs  of  said  companies  managed  and  directed  in  the 
manner  they  may  deem  most  conducive  to  the  best  interests  of 
the  holders  of  said  trust  certificates."  Thus  the  trustees,  as  the 
legal  owners  of  the  stock,  may  not  only  elect  who  they  please, 
but  may  elect  themselves,  as  directors  of  the  defendant ;  and  not 
only  may  manage,  but  it  is  their  duty  to  have  "the  affairs"  of  the 
defendant  managed  and  directed  in  the  manner  they  may  deem 
most  conducive  to  the  best  interests  of  the  holders  of  the  trust 
certificates.  In  other  words,  it  is  to  be  managed  in  the  interests 
of  the  Standard  Oil  Trust,  whose  principal  place  of  business  is  in 
New  York  City,  irrespective  of  what  might  be  its  duties  to  the 
people  of  this  state,  from  which  it  derives  its  corporate  life;  and 
its  real  stockholders  receive  their  dividends  from  the  profits  of 
that  trust,  and  not  from  the  earnings  of  their  company ;  for  the 
holders  of  the  trust  certificates  received  in  exchange  for  their 
stock  transferred  to  the  trustees  remain,  in  law  and  in  equity,  the 
real  owners  of  the  stock  so  transferred.  And  the  averment  in  the 
answer  that  the  dividends  of  the  company  are  paid  to  the  holders 
of  its  stock,  "appearing  as  such  on  its  stock-books,"  is  imma- 
terial, since  these  persons  are  not  the  owners,  but  the  trustees,  of 
the  stock.  In  fact,  the  averment  is  simply  a  part  of  the  evidence 
that  the  company,  through  its  directors,  recognizes  and  performs 
the  agreement  on  its  part.  The  payment  of  its  dividends  to  the 
persons  appearing  as  stockholders  on  its  stock-books  is  what 
enables  the  parties  to  the  agreement  to  realize  the  primary  object 
of  the  trust  agreement — the  accumulation  of  the  earnings  of  the 
various  companies,  partnerships,  and  individuals  named  in  the 
agreement,  as  a  common  fund,  from  which  the  holders  of  the 
trust  certificates  are  to  be  paid  dividends  when  declared  by  the 
trustees,  and  whereby  many  separate  interests,  being  united  under 
one  management,  form  a  virtual  monopoly,  through  the  power 
acquired,  of  so  controlling  the  production  and  price  of  petroleum 
and  its  products  as  to  destroy  competition. 

Applying,  then,  the  principle  that  a  corporation  is  simply  an 
association  of  natural  persons,  united  in  one  body  under  a  special 
denomination,  and  vested  by  the  policy  of  the  law  with  the  capac- 
ity of  acting  in  several  respects  as  an  individual,  and  disregard- 
ing the  mere  fiction  of  a  separate  legal  entity,  since  to  regard  it 


l6  DEFINITION    AND    CLASSIFICATION, 

in  an  inquiry  like  the  one  before  us  would  be  subversive  of  the 
purpose  for  which  it  was  invented,  is  there,  upon  an  analysis  of 
the   agreement,    room    for   doubt   that   the   act   of   all   the    stock- 
holders, officers,  and  directors  of  the  company  in  signing  it  should 
be  imputed  to  them  as  an  act  done  in  their  capacity  as  a  corpora- 
tion?    We  think  not,  since  thereby  all  the  property  and  business 
of  the  company  is,  and  was  intended  to  be,  virtually  transferred 
to  the  Standard  Oil  Trust,  and  is  controlled,  through  its  trustees, 
as  effectually  as  if  a  formal  transfer  had  been  made  by  the  direc- 
tors of  the  company.     On  a  question  of  this  kind,  the  fact  must 
constantly  be  kept  in  view  that  the  metaphysical   entity   has   no 
thought  or  will  of  its  own;  that  every  act  ascribed  to  it  emanates 
from  and  is  the  act  of  the  individuals  personated  by  it;  and  that 
it  can  no  more  do  an  act,  or  refrain  from  doing  it,  contrary  to 
the  will  of  these  natural  persons,  than  a  house  could  be  said  to 
act  independently  of  the  will  of  its  owner;  and,  where  an  act  is 
ascribed  to  it,  it  must  be  understood  to  be  the  act  of  the  persons 
associated  as  a  corporation,  and,  whether  done  in  their  capacity 
as    corporators    or    as    individuals,    must    be    determined    by    the 
nature  and  tendency  of  the  act.    It  therefore  follows,  as  we  think, 
from  the  discussion  we  have  given  the  subject,  that  where  all,  or 
a  majority,  of  the  stockholders  comprising  a  corporation  do  an 
act  which  is  designed  to  affect  the  property  and  business  of  the 
company,    and    which,    through    the    control    their    numbers    give 
them  over  the  selection  and  conduct  of  the   corporate   agencies, 
does  affect  the  property  and  business  of  the  company,  in  the  same 
manner  as  if  it  had  been  a  formal  resolution  of  its  board  of  direc- 
tors, and  the  act  so  done  is  ultra  vires  of  the  corporation  and 
against  public  policy,  and  was  done  by  them  in  their  individual 
capacity    for   the   purpose   of   concealing   their   real   purpose   and 
object,  the  act  should  be  regarded  as  the  act  of  the  corporation; 
and,  to  prevent  the  abuse  of  corporate  power,  may  be  challenged 
as  such  by  the  state  in  a  proceeding  in  quo  warranto.     *     *     * 
The  defendant,  as  we  have  shown,  in  making  and  entering  into 
the   trust   agreements,   exercised   a   power    for   which    it   had    no 
authority  under  the  laws  of  this  state,  and  is  continuing  to  per- 
form the  agreement  on  its  part.     In  addition  to  a  prayer  for  the 
forfeiture  of  the  defendant's  right  to  be  a  corporation,  the  state 
prays   for  such  other  relief  as  to  the  court  may  seem  just  and 
proper;  and,  in  the  opinion  of  the  court,  the  defendant  should  be 
ousted  from  the  power  to  make  and  perform  the  agreement  set 
forth  in  the  petition,  or  any  part  of  it.     And  in  this  connection  it 
is  proper  to  say  that,  in  the  judgment  of  the  court,  if  the  com- 
pany, through  its  directors  or  otherwise,  should  hereafter  recog- 
nize the  transfers  of  the  shares  that  have  been  made  on  its  stock- 
books  to  the  trustees  provided  for  it  in  the  trust  agreement,  or 
should  hereafter  make  such  transfers,  or  should  pay  dividends  to 
them  instead  of  to  the  real  owners  of  the  shares,  or  should  permit 
such  trustees  to  vote  on  shares  so  held  by  them  in  the  election  of 


DONOVAN    V.    PURTELL.  1 7 

its  directors,  in  every  such  case  it  must  be  regarded  and  held  as 
performing  the  agreement  in  violation  of  the  judgment  of  this 
court.  Judgment  ousting  the  defendant  from  the  right  to  make 
the  agreement  set  forth  in  the  petition,  and  of  the  power  to  per- 
form the  same.^ 


DOXOVAN  V.   PURTELL. 
1905.     216  111.  629,  75  X.  E.  334. 
Incorporating   to  Effect  a   Fraud. 

Appeal  from  the  Appellate  Court  for  the  Fourth  District ;  heard 
in  that  court  on  appeal  from  the  Circuit  Court  of  St.  Clair  county ; 
the  Hon.  R.  D.  W.  Holder,  Judge,  presiding. 

This  is  an  action  in  assumpsit,  begun  by  appellee  against  appel- 
lant on  X^ovember  24,  1903,  by  attachment  in  the  circuit  court  of 
St.  Clair  county.  The  writ  of  attachment  was  levied  on  appel- 
lant's interest  in  certain  land  situated  in  that  county.  Before  the 
trial,  to-wit,  on  i\Iarch  23,  1904,  by  agreement  of  the  parties  an 
order  was  entered,  releasing  the  real  estate,  levied  upon  under  the 
writ  of  attachment,  upon  the  execution  and  filing  by  appellant  of 
an  indemnity  bond.  The  declaration  consists  of  the  common 
counts  for  money  lent  by  appellee  to  defendant  at  his  request ;  for 
money  paid  out  and  expended  by  appellee  for  the  use  of  appellant 
at  his  request ;  for  money  received  by  appellant  for  the  use  of 
appellee;  for  money  for  interest  on  divers  sums  of  money  for- 
borne by  appellee  to  appellant  at  his  request,  etc.  A  bill  of  par- 
ticulars was  filed,  which,  besides  the  items  for  money  loaned  and 
due  in  1901,  contains  items  for  money  lent  by  appellee  to  appel- 
lant in  the  name  of  the  Fidelity  Realty  Company  in  1901,  and  for 
money  lent  to  appellant  by  appellee  and  promised  to  be  paid  by 
him  in  the  name  of  the  J.  T.  Donovan  Real  Estate  Company  in 
1901.  The  general  issue  was  filed  to  the  declaration.  A  trial  w^as 
had  before  the  court  and  jury,  resulting  in  a  verdict  in  favor  of 
appellee  against  appellant  for  the  sum  of  $1,430.00.  from  which 
the  plaintiff  remitted  the  sum  of  $71.80,  making  the  amount  of 
the  verdict  $1,358.20,  which  remittitur  was  approved  by  the  court. 
Motion  for  new  trial  was  overruled  and  judgment  rendered  on 
the  verdict  in  favor  of  appellee  against  appellant  for  $1,358.20 
and  costs.  An  appeal  was  taken  to  the  Appellate  Court  where 
the  judgment  has  been  affirmed.  The  present  appeal  is  prosecuted 
from  such  judgment  of  affirmance. 

The  facts  of  this  case  as  stated  by  the  Appellate  Court  in  their 
opinion  are  as   follows : 

"Appellee  for  many  years  worked  for  her  living  in  St.  Louis. 

*See  article,  "Piercing  the  Veil  of  Corporate  Entity,"  by  I.  Maurice 
Wormser.   12   Columbia   Law   Review,  496   (June,    1912). — Ed. 

2 — Private  Corp. 


l8  DEFINITION    AND    CLASSIFICATION. 

Missouri,  doing  housework.  Some  time  prior  to  this  suit,  having 
accumulated  the  sum  of  $1,200.00,  she  placed  it  at  interest  on  real 
estate  security,  and  the  note  representing  the  loan  came  due  in 
January,  1901.  At  that  time  appellant  was  engaged  in  the  real 
estate  and  loan  business  in  the  city  of  St.  Louis.  He  was  presi- 
dent of  the  J.  T.  Donovan  Real  Estate  Company,  of  which  his 
son,  Joseph  M.  Donovan,  was  vice-president.  The  latter  ^yas  also 
president  of  the  Fidelity  Realty  Company,  which  did  business  in 
the  same  room  with  the  other  company,  and  in  which  appellant 
was  likewise  interested.  Shortly  after  her  note  became  due,  ap- 
pellee took  it,  and  the  trust  deed  by  which  it  was_  secured,  to 
appellant's  place  of  business,  for  the  purpose  of  having  him  col- 
lect the  money  due  and  reinvest  it  for  her,  but  at  the  office  she 
made  arrangements  to  that  end  with  Joseph  M.  Donovan,  whom, 
she  testified,  she  considered  a  clerk.  In  June,  1901,  she  left  the 
city  and  did  not  return  until  the  following  October.  In  the  mean- 
time she  made  arrangements  with  a  friend,  Miss  Slaterly,  to  at- 
tend to  her  business.  During  her  absence  the  note  owned  by  her 
Avas  collected,  and  a  new  one  for  a  like  amount  secured  by  deed 
of  trust,  was  given  Miss  Slaterly,  who  afterwards  turned  the 
papers  over  to  appellee.  The  new  note  was  made  by  the  Fidelity 
Realty  Company,  by  J.  M.  Donovan,  its  president,  and  was  paya- 
ble to  the  order  of  George  M.  Cooper,  a  clerk  in  appellant's 
office,  who  endorsed  the  same  without  recourse.  It  was  secured 
by  a  deed  of  trust  upon  a  25-foot  lot  on  San  Francisco  avenue 
in  the  city  of  St.  Louis,  made  by  the  Fidelity  Realty  Company 
to  appellant,  as  trustee.  The  note  and  trust  deed  were  dated 
January  19,  1901,  but  were  not  delivered  to  Miss  Slaterly  until 
the  following  August.  With  these  papers  there  was  also  deliv- 
ered to  Miss  Slaterly  a  written  guaranty,  executed  by  J.  T.  Don- 
ovan Real  Estate  Company,  by  J.  T.  Donovan,  its  president, 
w'hich,  after  reciting  the  assignment  to  appellee  of  the  note  and 
securities  in  question,  proceeded  as  follows :  'And  whereas,  there 
is  being  erected  on  said  lot  of  ground,  certain  improvements, 
which  may  not  yet  be  fully  completed  and  paid  for;  now,  there- 
fore, in  consideration  of  said  sum  of  $1,200.00,  we  hereby  prom- 
ise and  agree  to  cause  said  improvements  to  be  fully  completed 
and  paid  for,  and  to  hold  the  said  Miss  Julia  Purtell  harmless 
from  all  loss  or  damage  on  account  of  mechanics*  liens,  or  on 
account  of  the  failure  of  the  said  Fidelity  Realty  Company  to 
fully  complete  said  improvements,  and  to  pay  for  the  same.  For 
the  consideration  aforesaid,  we  further  obligate  ourselves  to  hold 
Miss  Julia  Purtell  and  her  assigns  harmless  from  all  loss  on  ac- 
count of  said  investment,  principal  or  interest.'  The  guaranty 
also  contains  an  undertaking  on  the  part  of  the  maker  to  pay  the 
interest  notes  in  case  of  default  in  the  payment  thereof  for  a 
longer  period  than  thirty  days,  and  to  purchase  the  principal 
at  its  face  value,  with  interest  added,  within  six  months  after 
default  in  the  payment  of  the  same. 


DONOVAN    V.    PURTELL.  ,.  .  ^_  I9 

"Some  time  after  appellee  received  the  last  named  papers  she 
ascertained  that  the  lot  described  in  the  deed  of  trust  was  vacant ; 
that  no  improvements  were  being  made,  and  that  it  was  worth 
only  about  $150.00.  She  thereupon  called  upon  J.  AI.  Donovan, 
the  president  of  the  Fidelity  Realty  Company,  who  offered  to 
give  her  in  exchange  other  securities,  which,  on  examination,  she 
found  to  be  entirely  inadequate  to  properly  secure  the  debt.  She 
then  made  a  similar  demand  of  appellant  and  he  offered  her  to 
substitute  some  other  piece  of  property  for  that  which  appellee 
had.  but,  upon  examination  of  the  properties  named,  appellee  re- 
fused to  accept  any  of  them  on  the  ground  that  the  security  was 
wholly  insufficient.  While  negotiations  were  pending,  two  of  the 
interest  notes  were  paid  by  appellant.  Appellee  testified  that, 
when  she  asked  appellant  what  security  he  could  give  on  said 
notes,  he  said  he  could  not  give  her  money,  but  offered  to  pay 
her  in  eighteen  months  and  told  her  she  would  not  be  at  any  loss, 
but  this  appellant  denies.  Afterwards  negotiations  ceased,  and 
this  suit  was  brought. 

"Upon  the  trial  the  appellant  *  *  *  introduced  the  evidence 
of  himself  and  Joseph  ^,[.  Donovan.  *  *  *  These  witnesses 
were  corroborated  to  some  extent  by  the  securities  held  by  appel- 
lee, purporting  to  have  been  executed  by  the  two  corporations 
above  named.  On  the  contrary,  appellee  *  *  *  testified  that 
she  dealt  with  appellant  on  account  of  the  confidence  she  had  in 
him;  that  his  boys,  several  of  whom  were  in  the  office,  acted  just 
as  other  clerks;  she  said,  'I  paid  all  the  confidence  to  Mr.  Dono- 
van I  could.  I  would  not  pay  as  much  to  my  brothers  as  I  paid 
to  Mr.  Donovan,  because  he  was  a  Catholic  and  a  member  of  my 
church  and  a  good  living  man,  as  I  supposed.'  The  manner  of 
transacting  business  at  the  Donovan  office  was  fully  explained  by 
Lydia  M.  Cooper,  who  was  appellant's  stenographer  and  type- 
writer from  October,  1897,  to  April,  1903.  She  testified  that  the 
office  was  a  long,  narrow  room  about  twenty  feet  wide  and  sixty 
to  seventy-five  feet  long;  and  that  there  was  a  partition  in  the 
front  like  a  banking  counter,  and  in  the  rear  there  was  a  place 
about  ten  feet  square,  where  a  number  of  different  companies 
known  as  the  J.  T.  Donovan  Real  Estate  Companv.  the  Fidelitv 
Realty  Company,  the  Cunliff  Realty  Company,  'the  Fenimor'e 
Realty  Comi)any.  the  Cappa  Realty  Company  and  the  McKinley 
Company  had  headquarters;  that  the  different  corporations  had 
different  presidents,  but  that  appellant  was  really  the  man  who 
ran  the  whole  thing;  that  there  were  three  sons  of  appellant  in 
the  office,  and  several  other  clerks;  that  J.  T.  Donovan  controlled 
the  business  of  the  Fidelity  Realty  Company;  that  there  was  a 
bookkeeper  and  cashier  in  the  office;  that  over  the  door  there  was 
the  sign,  'J.  T.  Donovan  Real  Estate  Company;'  that  J.  M.  Dono- 
van 'never  made  any  transaction  without  J.  T.  Donovan  sanc- 
tioned it;'  that  the  Fidelity  Realty  Company  did  not  have  any 
financial  standing,  but  was  simply  gotten  up  to  keep  the  property 


20  DEFINITION    AND    CLASSIFICATION. 

out  of  judgment,  so  that  the  property  could  be  sold  and  trans- 
ferred without  judgment  being  paid  off;  that  she  had  heard  ap- 
pellant say  so  himself;  that  *he  said  there  were  judgments  against 
these  different  companies,  and  he  would  get  up  another  company 
and  put  the  property  in  the  name  of  the  new  company,  in  order 
that  it  could  be  transferred,  so  that  there  would  be  no  judgment 
against  it;'  that  he  used  the  property  of  the  companies  indiscrim- 
inately; that  he  would  settle  the  debts  of  the  J.  T.  Donovan  Real 
Estate  Company  with  these  properties,  no  matter  to  which  com- 
pany they  belonged;  that  the  stock  of  the  J.  T.  Donovan  Real 
Estate  Company  was  all  held  by  members  of  the  family ;  that 
Mr.  Donovan  got  the  property  named  in  the  deed  of  trust  in 
question  for  $325.00,  and  put  a  $1,200  loan  on  it. 

"Joseph  M.  Donovan,  when  placed  upon  the  witness  stand,  de- 
nied some  of  the  statements  made  by  Miss  Cooper  but  appellant, 
when  placed  upon  the  stand,  did  not  see  fit  to  deny  any  of  them." 

Mr.  Justice  Magruder  delivered  the  opinion  of  the  court.  *  *  * 

The  evidence  tends  to  show  that,  although  the  appellant  and  his 
sons  turned  over  to  appellee  these  worthless  securities  in  exchange 
for  her  money,  yet  that  appellant  himself  received  the  money,  and 
used  it  for  his  own  private  purposes,  and  sought  to  escape  per- 
sonal liability  by  covering  up  the  transaction  in  the  name  of  a  cor- 
poration, which  was  entirely  under  his  own  control.  This  being 
so,  the  trial  court  committed  no  error  in  refusing  to  instruct  the 
jury  to  find  the  issues  for  the  defendant.  It  would  have  been  im- 
proper to  give  such  instruction,  in  view  of  the  fact  that  the 
evidence  tended  to  prove  that  the  appellant  received  the  money, 
and  declined  to  pay  it  over. 

This  suit  is  not  brought  upon  the  notes,  executed  by  the  Fidelity 
Realty  Company.  Those  notes  and  the  trust  deed  securing  them 
were  tendered  back  to  the  appellant  upon  the  trial,  and,  upon  his 
refusal  to  receive  them,  placed  in  the  custody  of  the  court  for  the 
use  and  benefit  of  appellant.  The  object  of  the  suit  is  to  recover, 
under  the  common  counts,  the  money  actually  received  by  the  ap- 
pellant. 

The  instructions,  given  by  the  court  to  the  jury  on  behalf  of  the 
appellee,  submitted  to  the  jury  the  question  of  fact,  whether  the 
affairs  of  the  J.  T.  Donovan  Real  Estate  Company  and  the  Fidel- 
ity Realty  Company  were  controlled  by  J.  T.  Donovan  for  the 
transaction  of  his  private  business,  and  whether  or  not  he  person- 
ally controlled  both  of  these  corporations  when  they  received  the 
appellee's  money,  and  whether  or  not  her  money  was  received  for 
appellant's  own  private  individual  uses  and  purposes.  The  in- 
structions also  left  it  to  the  jury  to  find,  whether  or  not  the  ap- 
pellant was  conducting  his  business  in  the  name  of  the  J.  T.  Don- 
ovan Real  Estate  Company,  and,  through  that  company,  received 
appellee's  money  and  appropriated  the  same  to  his  own  use  and 
gave  her,  in  payment  of  it,  the  worthless  securities  above  referred 


DONOVAN    V.    PURTELL.  21 

to.  The  judgments  of  the  lower  courts,  finding  for  the  appellee, 
settle  these  questions  of  fact,  so  far  as  we  are  concerned,  against 
tlie  appellant. 

Appellant  was  president  of  the  J.  T.  Donovan  Real  Estate  Com- 
pany, and  his  son,  Joseph  'M.  Donovan,  was  the  vice-president  of 
that  company,  and  Joseph  M.  Donovan,  the  appellant's  son,  was 
the  president  of  the  Fidelity  Realty  Company.  Both  of  these  con- 
cerns were  controlled,  managed  and  dominated  by  the  appellant, 
J.  T.  Donovan.  The  officer  or  controlling  manager  of  a  corpora- 
tion cannot  use  it.  and  its  name,  for  the  transaction  of  his  own 
private  business,  and  to  escape  personal  liability  on  his  part.  The 
theor}-,  upon  which  the  appellant  defends  this  suit,  is  that  the  lia- 
bility to  appellee  was  not  his  liability,  but  that  of  the  corporation 
known  as  the  Fidelity  Realty  Company. 

In  Hoffman  v.  Reichert,  147  111.  274,  it  was  held  that  the  direct- 
ors of  a  private  corporation  have  no  right  under  any  circumstances 
to  use  their  official  position   for  their  own  individual  benefit. 

In  the  case  of  Bank  v.  Trebein  Co..  59  Ohio  St.  316,  it  was 
said :  "The  fiction,  by  which  an  ideal  legal  entity  is  attributed  to 
a  duly  formed  incorporated  company,  existing  separate  and  apart 
from  the  individuals  composing  it,  is  of  such  general  utility  and 
application,  as  frequently  to  induce  the  belief  that  it  must  be  uni- 
versal, and  be  in  all  cases  adhered  to.  although  the  greatest  frauds 
may  thereby  be  perpetrated  under  the  fiction  as  a  shield.  But 
modern  cases,  sustained  by  the  best  text  writers,  confine  the  fiction 
to  the  purposes  for  which  it  was  adopted — convenience  in  the 
transaction  of  business  and  in  suing  and  being  sued  in  its  cor- 
porate name,  and  the  continuance  of  its  rights  and  liabilities,  im- 
affected  by  changes  in  its  corporate  members ;  and  have  repudiated 
it  in  all  cases  where  it  has  been  insisted  on  as  a  protection  to 
fraud,  or  any  other  illegal  transaction." 

In  Cook  on  Corporations  (5th  ed.,  sec.  663),  it  is  said:  "A  cor- 
poration is  often  organized  to  act  as  a  'cloak'  for  frauds.  Such 
cases  as  these  are  becoming  common,  and  the  courts  are  becoming 
more  and  more  inclined  to  ignore  the  corporate  existence,  when 
necessary-,  in  order  to  circumvent  the  fraud."  (See  also  Lacli- 
man  v.  Martin,  139  111.  450.)  In  Morse  on  Banks  and  Banking 
(vol.  I — 4th  ed.— sec.  128).  it  is  said:  "If  bank  directors  do  not 
manage  the  affairs  and  business  of  the  bank  according  to  the 
directions  of  the  charter  and  in  good  faith,  they  will  be  liable  to 
make  good  all  losses,  which  their  misconduct  may  inflict  upon 
either  stockholders  or  creditors,  or  both.  *  *  *  They  may  be 
held  to  account  to  an  injured  party  in  a  court  of  chancer}',  or 
they  or  any  of  their  number,  who  shared  in  the  wrong-doing,' may 
be  sued  at  law  for  damages."  So,  in  the  case  at  bar.  appellant,  as 
an  officer  of  one  or  more  of  the  corporations  here  involved,  was 
guilty  of  such  a  fraud  in  transferring  to  appellee  these  worthless 
securities  in  payment  of  the  money  which  he  owed  her.  that  he 
can  be  held  liable  personally  for  the  loss  inflicted  upon  her. 


22  DEFINITION    AND    CLASSIFICATION. 

Even  if  the  corporation  be  regarded  as  the  real  debtor,  and  the 
appellant  as  only  its  agent,  yet  inasmuch  as  he  was  guilty  of  fraud 
perpetrated  upon  appellee,  the  law  will  hold  him  liable.  In  i 
American  and  English  Encyclopedia  of  Law  (2d  ed.,  p.  1135),  it 
is  said :  "An  agent  will  be  held  personally  liable  to  third  persons 
for  all  damages,  sustained  by  them  in  consequence  of  any  fraudu- 
lent or  malicious  acts  committed  by  him  on  behalf  of  his  principal, 
and,  in  an  action  against  the  agent  for  fraud,  the  fact  that  he 
derived  no  personal  profit  or  benefit  therefrom  is  immaterial."  In 
Ree  V.  Peterson,  91  111.  288.  it  is  said :  "In  an  action  at  law  for 
damages,  the  fact  that  a  defendant  acted  throughout  in  the  capac- 
ity of  agent,  in  a  fraud  perpetrated  by  him,  will  afiford  him  no 
excuse."  (See  also  Seddon  v.  Connell,  10  Simons,  86;  Windram 
V.   French,   151   Mass.   549.) 

It  is  claimed,  on  the  part  of  the  appellant,  that  the  court  below 
erred  in  permitting  appellee  to  prove  that  the  appellant  promised 
to  repay  the  money  to  her.  It  is  said  that  this  was  a  promise  to 
pay  the  debt  of  a  third  person,  to-wit:  of  the  Fidelity  Realty 
Company,  and  that,  under  the  Statute  of  Frauds,  the  promise  to 
pay  the  debt  of  a  third  person  must  be  in  writing.  The  statute 
of  the  state  of  Missouri  in  relation  to  the  Statute  of  Frauds  upon 
this  subject,  which  is  almost  identical  with  our  own,  was  intro- 
duced in  evidence  over  the  objection  of  appellee.  It  was  not 
pleaded  as  a  defense ;  and  the  general  rule  is  that,  where  the 
statute  of  another  state  is  relied  upon  as  a  defense,  it  must  be 
pleaded  as  set  out,  at  least  in  substance,  and  must  be  proved  on 
the  trial,  and,  if  it  is  not  pleaded,  it  is  error  to  permit  it  to  be 
proved.  (Palmer  v.  Marshall,  60  111.  289.)  But  whether  or  not 
this  rule  applies  here,  where  the  declaration  contained  merely  the 
common  counts,  and  did  not  set  up  any  contract,  makes  no  dififer- 
ence  under  the  circumstances  of  this  case,  because  the  proof  tends 
to  show  that,  when  appellant  received  appellee's  money,  he  was 
not  conducting  business  under  a  bona  fide  corporate  organization, 
but  was  using  a  corporate  entity  for  the  transaction  of  his  private 
business,  and,  as  he  was,  therefore,  personally  liable  to  the  appel- 
lee for  the  repayment  of  her  money,  his  promise  was  to  pay  his 
own  debt,  and  not  the  debt  of  a  third  person. 

It  is  said  that  the  court  erred  in  the  admission  of  certain  testi- 
mony, introduced  by  the  appellee.  We  are  satisfied  with  the  fol- 
lowing statement  upon  this  subject,  made  by  the  Appellate  Court 
in  their  opinion  deciding  this  case,  to-wit:  "Appellant  also  claims 
that  the  court  erred  in  permitting  appellee  to  show  the  course  of 
business  pursued  by  him,  his  exercise  of  control  over  the  various 
cornpanies  in  the  same  office,  and  the  indiscriminate  manner,  in 
which  he  used  the  money  of  said  companies,  and  in  admitting 
evidence,  tending  to  show  the  reason  why  the  appellee  had  special 
confidence  in  him.  In  our  opinion,  this  evidence  was  all  proper, 
as  bearing  upon  the  question  whether  the  appellant  was  really 
conducting  his  own  business  under  the  name  of  the  several  cor- 


LIVERPOOL     INSURANCE     CO.     V.     MASSACHUSETTS.  23 

porations  for  his  own  benefit,  and  also  whether  he  took  advantage 
of  appellee's  special  confidence  in  him  to  use  her  money,  and  give 
her  securities,  which  were  practically  worthless." 

The  objection  is  made  that  a  recovery  cannot  be  had  in  this  kind 
of  case  under  the  common  counts.  We  are  unable  to  concur  in 
this  contention.  In  Wilson  v.  Turner,  164  111.  398.  this  court  said 
(p.  403)  :  "An  action  for  money  had  and  received  will  lie  when- 
ever one  person  has  received  money  which,  in  justice,  belongs  to 
another,  and  which,  in  justice  and  right,  should  be  returned.  *  *  * 
When,  therefore,  according  to  this  rule,  one  person  obtains  the 
money  of  another  which  it  is  inequitable  or  unjust  for  him  to  re- 
tain, the  person  entitled  to  it  may  maintain  an  action  for  money 
had  and  received  for  its  recovery."  Inasmuch  as,  in  the  case  at 
bar.  there  was  evidence,  tending  to  show  that  appellant  had  ob- 
tained money  from  appellee,  which  it  was  unjust  and  inequitable 
for  him  to  retain,  she  is  entitled  to  maintain  the  present  action 
for  the  recovery  of  such  money.     *     *     * 

For  the  reasons  above  stated,  we  are  of  the  opinion  that  the 
judgments  of  the  lower  courts  were  correct.  Accordingly,  the 
judgment  of  the  Appellate  Court,  affirming  that  of  the  circuit 
court,  is  affirmed. 


LIVERPOOL   INSURANCE   CO.   v.   MASSACHUSETTS.' 
1870.      10  Wall.    (U.   S.)    566,   19  L.  ed.   1029. 

The  State  of  Massachusetts,  claiming  of  the  plaintifiF  in  error 
a  tax  of  four  per  cent,  on  the  premiums  received  in  the  course 
of  its  business  in  that  state,  obtained  a  decree  in  her  courts  en- 
joining the  company  from  further  prosecution  of  its  business, 
until  the  taxes  found  to  be  due  were  paid.  The  law  of  Massa- 
chusetts under  w^hich  this  tax  was  assessed,  enacts  that  "Each 
fire,  marine,  and  fire  and  marine,  insurance  company  incorporated 
or  associated  under  the  laws  of  any  government  or  state  other 
than  one  of  the  United  States,  shall  annually  pay  to  the  Treasurer 
of  the  Commonwealth  a  tax  of  four  per  cent,  upon  all  premiums 
charged  or  received  on  contracts  made  in  this  Commonwealth  for 
insurance  of  property." 

The  case  is  brought  to  this  court  on  the  ground  that  in  its 
application  to  the  plaintifif  in  error,  the  statute  of  Massachusetts 
is  in  conflict  with  the  provision  of  the  Constitution  which  confers 
on  Congress  the  right  to  regulate  commerce  with  foreign  nations 
and  among  the  states,  and  with  that  which  secures  to  the  citizen 
of  each  state  all  the  privileges  and  immunities  of  citizens  in  the 
several  states. 

*  See  the  decision  of  the  court  below  in  Oliver  v.  The  Liverpool  and 
London  Life  and  Fire  Insurance  Co.,  100  Mass.  531. 


24  DEFINITION    AND    CLASSIFICATION. 

Assuming  that  the  plaintiff  in  error  is  not  a  corporation,  but 
is  a  partnership  or  association  of  individuals,  some  of  which  are 
subjects  of  Great  Britain,  and  others  citizens  of  the  State  of  New 
York,  it  is  argued  that  the  rights  of  the  former  are  protected 
by  the  treaty  between  the  United  States  and  Great  Britain,  and 
the  rights  of  the  latter  by  section  2,  article  4,  of  the  Federal 
Constitution  above  referred  to. 

The  company  was  originally  formed  by  a  "deed  of  settlement." 

This  instrument,  as  far  as  it  could  be  done  without  the  aid  of 
Parliament,  established  a  company  under  the  name  of  The  Liver- 
pool Life  and  Fire  Insurance  Company,  with  a  capital  of  £2,000,- 
000,  which  was  divided  into  one  hundred  thousand  shares  of  £20 
each,  and  declared  its  purpose  to  be,  making  insurance  on  life 
and  against  fire.  These  shares  could  be  sold  and  transferred, 
and  executors  and  administrators  represented  them  in  the  com- 
pany on  the  death  of  the  owner.  If,  by  the  laws  of  the  associa- 
tion, a  share  became  forfeited,  the  owner  was  released  from  all 
further  liability  to  the  company.  The  business  of  the  company 
was  to  be  conducted  by  a  board  of  directors,  exclusively,  and 
they  could  make  by-laws  and  change  and  modify  them.^  There 
was  a  covenant  that  suits  might  be  brought  by  or  against  the 
company  in  the  names  of  one  or  more  directors,  which  should 
bind  the  stockholders,  and  that  no  stockholder  would  plead  in 
abatement  the  nonjoinder  of  the  others;  and  it  was  further 
covenanted  that  a  judgment  so  obtained  against  a  director  might 
be  made  out  of  the  property  of  any  of  the  stockholders.  Numer- 
ous other  provisions  are  found  in  the  original  articles,  which  con- 
sisted of  over  a  hundred  sections,  but  only  those  are  referred  to 
here  which  bear  on  the  question  we  are  considering.  There  were 
also  three  subsequent  deeds  of  settlement,  and  three  Acts  of 
Parliament  were  passed  to  give  efficiency  to  the  purposes  of  the 
association. 

The  first  of  these  Acts  provided  that  the  association  might  sue 
and  be  sued  in  the  name  of  the  chairman  or  deputy  chairman 
of  the  board  of  directors;  that  the  stockholders  might  sue  the 
company  as  plaintiffs,  or  be  sued  by  it  as  defendants.  It  regu- 
lated the  manner  in  which  the  shareholders  might  be  made 
individually  liable  for  the  debts  of  the  association;  and  it  de- 
clared that  the  Act  should  not  be  construed  to  incorporate  the 
company  or  relieve  its  members  from  their  individual  liability, 
except  as  provided  in  the  Act. 

The  second  Act  of  Parliament  changed  the  name  of  the  com- 
pany to  that  which  it  now  bears,  and  authorized  it  to  make  con- 
tracts by  the  new  name ;  and  it  also  contained  a  provision  that 
the  Act  should  not  make  the  company  a  corporation;  and  there 
was  a  third  Act  which  authorized  amalgamation  with  another 
company,  and  which  again  provides  against  its  being  construed 
into  an  Act  of  incorporation  or  a  limited  liability  partnership. 


LIVERPOOL     INSURANCE     CO.     V.     MASSACHUSETTS.  2$ 

MR.  JUSTICE  MILLER:  The  case  of  Paul  v.  Virginia,  8 
Wall.  i68,  decided  that  the  business  of  insurance,  as  ordinarily 
conducted,  was  not  commerce,  and  that  a  corporation  of  one  state, 
having  an  agency  by  which  it  conducted  the  business  in  another 
state,  was  not  engaged  in  commerce  between  the  states. 

It  was  also  held  in  that  case  that  a  corporation  was  not  a 
citizen  within  the  meaning  of  that  clause  of  the  Constitution 
which  declares  that  the  citizens  of  each  state  shall  be  entitled 
to  all  the  privileges  and  immunities  of  citizens  in  the  several 
states,  and  that  a  corporation  created  by  a  state  could  exercise 
none  of  the  functions  or  privileges  conferred  by  its  charter  in 
any  other  state  of  the  Union,  except  by  the  comity  and  consent 
of  the  latter. 

These  propositions  dispose  of  the  case  before  us,  if  plaintiff 
is  a  foreign  corporation,  and  was,  as  such,  conducting  business 
in  the  State  of  Massachusetts,  and  we  proceed  to  inquire  into 
its  character  in  this  regard. 

The  institution  now  known  as  the  Liverpool  and  London  Life 
and  Fire  Insurance  Company,  doing  an  immense  business  in  Eng- 
land and  in  this  country,  was  first  organized  at  Liverpool  by  what 
is  there  called  a  deed  of  settlement,  and  would  here  be  called 
articles  of  association. 

It  will  be  seen  by  reference  to  the  powers  of  the  association,  as 
organized  under  the  deed  of  settlement,  legalized  and  enlarged 
by  the  Acts  of  Parliament,  that  it  possesses  many,  if  not  all.  the 
attributes  generally  found  in  corporations  for  pecuniary  profit 
which  are  deemed  essential  to  their  corporate  character. 

1.  It  has  a  distinctive  and  artificial  name  by  which  it  can 
make  contracts. 

2.  It  has  a  statutory  provision  by  which  it  can  sue  and  be 
sued  in  the  name  of  one  of  its  officers  as  the  representative  of 
the  whole  body,  which  is  bound  by  the  judgment  rendered  in 
such  suit. 

3.  It  has  provision  for  perpetual  succession  by  the  transfer 
and  transmission  of  the  shares  of  its  capital  stock,  whereby  new 
members  are  introduced  in  place  of  those  who  die  or  sell  out. 

4.  Its  existence  as  an  entity  apart  from  the  shareholders  is 
recognized  by  the  Act  of  Parliament  which  enables  it  to  sue  its 
shareholders  and  be  sued  by  them. 

The  subject  of  the  powers,  duties,  rights  and  liabilities  of 
corporations,  their  essential  nature  and  character,  and  their  rela- 
tion to  the  business  transactions  of  the  community,  have  under- 
gone a  change  in  this  country  within  the  last  half  century,  the 
importance  of  which  can  hardly  be  overestimated. 

They  have  entered  so  extensively  into  the  business  of  the  coun- 
try, the  most  important  part  of  which  is  carried  on  by  them,  as 
banking  companies,  railroad  companies,  express  companies,  tele- 
graph companies,  insurance  companies,  etc.,  and  the  demand  for 
the   use   of   corporate  powers   in   combining   the   capital    and    the 


26  DEFINITION    AND    CLASSIFICATION. 

energy  required  to  conduct  these  large  operations  is  so  imperative, 
that  both  by  statute,  and  by  the  tendency  of  the  courts  to  meet 
the  requirements  of  these  pubHc  necessities,  the  law  of  corpora- 
tions has  been  so  modified,  liberaHzed  and  enlarged,  as  to  con- 
stitute a  branch  of  jurisprudence  with  a  code  of  its  own,  due 
mainly  to  very  recent  times.  To  attempt,  therefore,  to  define  a 
corporation,  or  limit  its  powers  by  the  rules  which  prevailed 
when  they  were  rarely  created  for  any  other  than  municipal  pur- 
poses, and  generally  by  royal  charter,  is  impossible  in  this  country 
and  at  this  time. 

Most  of  the  states  of  the  Union  have  general  laws  by  which 
persons  associating  themselves  together,  as  the  shareholders  in 
this  company  have  done,  become  a  corporation. 
'  The  banking  business  of  the  states  of  the  Union  is  now  con- 
ducted chiefly  by  corporations  organized  under  a  general  law  of 
Congress,  and  it  is  believed  that  in  all  the  states  the  articles  of 
association  of  this  company  would,  if  adopted  with  the  usual 
formalities,  constitute  it  a  corporation  under  their  general  laws, 
or  it  would  become  so  by  such  legislative  ratification  as  is  given 
by  the  Acts  of  Parliament  we  have  mentioned. 

To  this  view  it  is  objected  that  the  association  is  nothing 
but  a  partnership,  because  its  members  are  liable  individually  for 
the  debts  of  the  company.  But  however  the  law  on  this  subject 
may  be  held  in  England,  it  is  quite  certain  that  the  principle  of 
personal  liability  of  the  shareholders  attaches  to  a  very  large  pro- 
portion of  the  corporations  of  this  country,  and  it  is  a  principle 
which  has  warm  advocates  for  its  universal  application  when  the 
organization  is  for  pecuniary  gain. 

So,  also,  it  is  said  that  the  fact  that  there  is  no  provision 
either  in  the  deed  of  settlement  or  the  Act  of  Parliament  for  the 
company  suing  or  being  sued  in  its  artificial  name  forbids  the 
corporate  idea.  But  we  see  no  real  distinction  in  this  respect 
between  an  Act  of  Parliament,  which  authorized  suits  in  the 
name  of  the  Liverpool  and  London  Fire  and  Life  Insurance  Com- 
pany, and  that  which  authorized  suit  against  that  company  in  the 
name  of  its  principal  officer.  If  it  can  contract  in  the  artificial 
name  and  sue  and  be  sued  in  the  name  of  its  officers  on  those 
contracts,  it  is  in  effect  the  same,  for  process  would  have  to  be 
served  on  some  such  officer  even  if  the  suit  were  in  the  artificial 

name. 

It  is  also  urged  that  the  several  Acts  of  Parliament  we  have 
mentioned  expressly  declare  that  they  shall  not  be  held  to  con- 
stitute the   body  a  corporation. 

But  whatever  may  be  the  effect  of  such  declaration  in  the 
courts  of  that  country,  it  cannot  alter  the  essential  nature  of  a 
corporation  or  prevent  the  courts  of  another  jurisdiction  from 
inquiring  into  its  true  character,  whenever  that  may  come  in 
issue.  It  appears  to  have  been  the  policy  of  the  English  law  to 
attach    certain    consequences    to    incorporated    bodies,    which    ren- 


LIVERPOOL     insurance;     CO.     V.     MASSACHUSETTS,  2/ 

dered  it  desirable  that  such  associations  as  these  should  not  be- 
come technically  corporations.  Among  these,  it  would  seem  from 
the  provisions  of  these  Acts,  is  the  exemption  from  individual 
liability  of  the  shareholder  for  the  contracts  of  the  corporation. 
Such  local  policy  can  have  no  place  here  in  determining  whether 
an  association,  whose  powers  are  ascertained  and  its  privileges 
conferred  by  law,  is  an  incorporated  body. 

The  question  before  us  is,  whether  an  association,  such  as  the 
one  we  are  considering,  in  attempting  to  carry  on  its  business  in 
a  manner  which  requires  corporate  powers  under  legislative  sanc- 
tion, can  claim,  in  a  jurisdiction  foreign  to  the  one  which  gave 
those  powers,  that  it  is  only  a  partnership  of  individuals. 

We  have  no  hesitation  in  holding  that,  as  the  law  of  corpora- 
tions is  understood  in  this  country,  the  association  is  a  corpora- 
tion, and  that  the  law  of  Massachusetts,  which  only  permits  it  to 
exercise  its  corporate  function  in  that  state  on  the  condition  of 
payment  of  a  specific  tax,  is  no  violation  of  the  Federal  Consti- 
tution or  of  any  treaty  protected  by  said  Constitution. 

Judgment  affirmed. 

MR.  JUSTICE  BRADLEY:  Whilst  I  agree  in  the  result 
which  the  court  has  reached,  I  differ  from  it  on  the  question 
whether  the  company  is  a  corporation.  I  think  it  is  one  of  those 
special  partnerships  which  are  called  joint  stock  companies,  well 
known  in  England  for  nearly  a  century,  and  cannot  maintain  an 
action  or  be  sued  as  a  corporation  in  this  country  without  legis- 
lative aid.  But  as  it  is  a  company  associated  under  the  laws  of 
a  foreign  country,  it  comes  within  the  scope  of  the  Massachusetts 
statute,  and  cannot  claim  exemption  from  its  operation  for  the 
causes  alleged  in  that  behalf.  It  could  not  have  been  the  intent 
of  the  treaty  of  1815  to  prevent  the  states  from  imposing  taxes 
or  license  laws  upon  either  British  corporations  or  joint  stock 
companies  desiring  to  establish  banking  or  insurance  business 
therein.  And  certainly  these  companies  cannot  be  exempted  from 
such  laws  on  the  ground  that  citizens  of  other  states  have  chosen 
to  take  some  of  their  shares. - 

'The  New  Jersey  cases  are  in  accord.  See  Tide-Water  Pipe  Co.  v. 
State  Board  of  .Assessors,  57  N.  J.  L.  .S16,  31  .\tl.  220,  27  L.  R.  A.  684; 
Edgeworth  v.  Wood,  58  N.  J.  L.  463.  33  Atl.  940. 

But  see,  Great  Southern  Fire  Proof  Hotel  Co.  v.  Jones,  177  U.  S. 
449,  44  L.  ed.  482,  20  Sup.  Ct.  690.— Ed. 


28  DEFINITION    AND    CLASSIFICATION. 

PEOPLE  ex  rel.  WINCHESTER  v.  COLEMAN  et  al. 

1892.    133  N.  Y.  279,  31  N.  E.  96,  16  L.  R.  A.  183. 

Joint  Stock  Association. 

Appeal  from  order  of  the  General  Term  of  the  Supreme  Court, 
in  the  first  judicial  department,  made  February  13,  1891,  which 
affirmed  a  judgment  in  favor  of  plaintiff,  entered  upon  a  decision 
of  the  court  on  trial  at  Special  Term,  vacating  an  assessment. 

This  was  a  proceeding  by  certiorari  to  review  the  action  of  the 
commissioners  of  taxes  and  assessments  of  the  city  of  New  York, 
in  imposing  an  assessment  upon  the  capital  stock  of  the  National 
Express  Company,  a  joint-stock  company,  of  which  the  relator 
is  treasurer  for  the  year  1888. 

The  facts,  so  far  as  material,  are  stated  in  the  opinion. 

FINCH,   J. — The   relator   was   taxed   upon   its   capital   on   the 
ground  that  it  had  become  a  corporation  within  the  meaning  of 
the    provision    of    the    Revised    Statutes    which    enacts    that    "all 
monied  or  stock  corporations  deriving  an  income  or  profit   from 
their  capital  or  otherwise,  shall  be  liable  to  taxation  on  their  cap- 
ital in  the  manner  hereinafter  prescribed."     (i_R.  S.  title  4,  chap. 
13,  part  I.)     The  company  was  formed  as  a  joint-stock  company 
or  association  in  1853  by  a  written  agreement  of  eight  individuals 
with  each  other,  the  whole  force  and  effect  of  which,  in  consti- 
tuting and  creating  the  organization,  rested  upon  the  common-law 
rights  of  the  individuals  and  their  power  to  contract  with  each 
other.     The   relation   they   assumed   was   wholly   the   product    of 
their   mutual    agreement   and   depended    in    no    respect   upon   the 
grant  or  authority  of  the  state.     It  was  entered  into  under  no 
statutory    license    or   permission,    neither    accepting   nor    designed 
to  accept  any  franchise  from  the  sovereign,  but   founded  wholly 
upon  the  individual  rights  of  the  associates  to  join  their  capital 
and  enterprise  in  a  relation  similar  to  that  of  a  partnership.     A 
few  years  earlier  the  legislature  had  explicitly  recognized  the  ex- 
istence and  validity  of  such  organizations,  founded  upon  contract 
and  evolved  from  the  common-law  rights  of  the  citizens.     (Laws 
of    1849,    chap.    258.)      That    act    provided    that    any    joint-stock 
company  or  association,  which  consisted  of  seven  or  more  mem- 
bers, might  sue  or  be  sued  in  the  name  of  its  president  or  treas- 
urer,  and   with  the   same    force   and   effect,   so   far   as   the   joint 
property  and  rights  were  concerned,  as  if  the  suit  should  be  pros- 
ecuted in  the  names  of  the  associates.     But  the  act  explicitly  dis- 
claimed   any   purpose    of    converting   the    joint-stock    associations 
recognized  as  existing,  into  corporations  by  a  section  prohibiting 
any  such  construction.     (§  5.)     In  1851  the  act  was  amended  in 
its  form  and  application,  but  in  no  respect  material  to  the  present 
inquiry.     There  is  no  doubt,   therefore,   that  when  the  company 


PEOPLE    EX    REL.    WINCHESTER   V.    COLEMAN    ET    AL.  2g 

was  formed  and  went  into  operation  the  law  recognized  a  distinc- 
tion and  substantial  difference  between  joint-stock  companies  and 
corporations  and  never  confused  one  with  the  other,  and  that  the 
existing  statute  which  taxed  the  capital  of  corporations  had  no 
reference  to  or  operation  upon  joint-stock  companies  or  associa- 
tions. 

But  two  things  have  since  occurred.  The  legislature,  while 
steadily  preserving  the  distinction  of  names,  has  with  equal  per- 
sistence confused  the  things  by  obliterating  substantial  and  char- 
acteristic marks  of  difference,  until  it  is  now  claimed  that  ^  the 
joint-stock  associations  have  grown  into  and  become  corporations 
by  force  of  the  continued  bestowal  upon  them  of  corporate  at- 
tributes. It  is  said,  and  very  probably  correctly  said,  that  the 
legislature  may  create  a  corporation,  without  explicitly  declaring 
it  to  be  such,  by  the  bestowal  of  a  corporate  franchise  or  cor- 
porate attributes,  and  the  cases  of  banking  associations  are  re- 
ferred to  as  instances  of  actual  occurrence.  (Thomas  v.  Dakin, 
22  Wend.  9;  Bank  of  Watertown  v.  Watertown,  25  Ind.  686; 
People  v.  Niagara,  4  Hill,  20.)  It  is  added  that  such  result  may 
happen  even  without  the  legislative  intent,  and  because  the  gift 
of  corporate  powers  and  attributes  is  tantamount  to  a  corporate 
creation.  It  is  then  asserted  that  a  series  of  statutes,  beginning 
with  the  act  of  1849,  has  ended  in  the  gift  to  joint-stock  associa- 
tions of  every  essential  attribute  possessed  by  and  characteristic 
of  corporations  (Laws  of  1853,  chap.  153.  Laws  of  1854,  chap. 
245,  Laws  of  1867,  chap.  289)  ;  that  the  lines  of  distinction  be- 
tween the  two,  however  far  apart  in  the  beginning,  have  steadily 
converged  until  they  have  melted  into  each  other  and_  become 
identical ;  that  every  distinguishing  mark  and^  characteristic  has 
been  obliterated,  and  no  reason  remains  why  joint-stock  associa- 
tions should  not  be  in  all  respects  treated  and  regarded  as  cor- 
porations. 

Some  of  this  contention  is  true.  The  case  of  People  ex  rel. 
Piatt  V.  Wemple  (117  N.  Y.  136),  shows  very  forcibly  how  al- 
most the  full  measure  of  corporate  attributes  has,_  by  legislative 
enactment,  been  bestowed  upon  joint-stock  associations,  until  the 
difference,  if  there  be  one,  is  obscure,  elusive,  and  difficult  to  see 
and  describe.  And  yet  the  truth  remains  that  all  along  the  line 
of  legislation  the  distinctive  names  have  been  retained  as  indica- 
tive and  representative  of  a  difference  in  the  organizations  them- 
selves. As  recently  as  the  acts  of  1880  and  1881,  which  formed 
the  subject  of  consideration  in  the  Wemple  case,  the  legislature, 
dealing  with  the  subject  of  taxation  and  desiring  to  tax  business 
and  franchises,  imposed  the  liability  upon  "every  corporation, 
joint-stock  company  or  association  whatever  now  or  hereafter 
incorporated  or  organized  under  any  law  of  this  state."  It  is 
significant  that  the  words  "or  organized"  were  inserted  by  amend- 
ment, and  evidently  for  the  understood  reason  that  joint-stock 
companies  could  not  properly  be  said  to  be  "incorporated,"  but 


30 


DEFINITION    AND    CLASSIFICATION. 


might  be  correctly  described  as  "organized"  under  the  laws  of  the 
state.  This  persistent  distinction  in  the  language  of  the  statutes 
I  should  not  be  inclined  to  disregard  or  treat  as  of  no  practical 
consequence,  when  seeking  to  arrive  at  the  true  intent  and  proper 
construction  of  the  statute,  even  if  I  were  unable  to  discover  any 
practical  or  substantial  difference  between  the  two  classes  of  or- 
ganizations upon  which  it  could  rest,  or  out  of  which  it  grew, 
for  the  distinction  so  sedulously  and  persistently  observed  would 
strongly  indicate  the  legislative  intent,  and  so  the  correct  con- 
struction. 

But  I  think  there  was  an  original  and  inherent  difference  be- 
tween the  corporate  and  joint-stock  companies  known  to  our  law 
which  legislation  has  somewhat  obscured,  but  has  not  destroyed, 
and  that  difference  is  the  one  pointed  out  by  the  learned  counsel 
for  the  respondent,  and  which  impresses  me  as  logical  and  well 
supported  by  authority.  It  is  that  the  creation  of  the  corporation 
merges  in  the  artificial  body  and  drowns  in  it  the  individual 
rights  and  liabilities  of  the  members,  while  the  organization  of  a 
joint-stock  company  leaves  the  individual  rights  and  liabilities 
unimpaired  and  in  full  force.  The  idea  was  expressed  in  Super- 
visors of  Niagara  v.  People  (7  Hill,  512),  and  in  Gifford  v.  Liv- 
ingston (2  Den.  380),  by  the  statement  that  the  corporators  lost 
their  individuality  and  merged  their  individual  characters  into  one 
artificial  existence;  and  upon  these  authorities  a  corporation  is 
defined  on  the  part  of  the  respondents  to  be  "an  artificial  person 
created  by  the  sovereign  from  natural  persons  and  in  which  arti- 
ficial person  the  natural  persons  of  which  it  is  composed  become 
merged  and  non-existent."  I  am  conscious  that  legal  definitions 
invite  and  provoke  criticism,  because  the  instances  are  rare  in 
which  they  prove  to  be  perfectly  accurate ;  and  yet  this  one  of- 
fered to  us  may  be  accepted  if  it  successfully  bears  some  sufficient 
test.  In  putting  it  on  trial  we  may  take  the  nature  of  the  indi- 
vidual liability  of  the  corporators  on  the  one  hand  and  of  the  as- 
sociates on  the  other,  for  the  debts  contracted  by  their  respective 
organizations,  as  a  sufficient  test  of  the  difference  between  them, 
and  contrast  their  nature  and  character. 

It  is  an  essential  and  inherent  characteristic  of  a  corporation 
that  it  alone  is  primarily  liable  for  its  debts,  because  it  alone 
contracts  them,  except  as  that  natural  and  necessary  consequence 
of  its  creation  is  modified  in  the  act  of  its  creation  by  some  ex- 
plicit command  of  the  statute  which  either  imposes  an  express 
liability  upon  the  corporators  in  the  nature  of  a  penalty,  or  affirm- 
atively retains  and  preserves  what  would  have  been  the  common- 
law  liability  of  the  members  from  the  destruction  involved  in  the 
corporate  creation.  In  other  words,  the  individual  liability  of  the 
members,  as  it  would  have  existed  at  common  law,  is  lost  by 
their  creation  into  a  corporation,  and  exists  thereafter  only  by 
force  of  the  statute,  upon  some  new  and  modifying  conditions, 
to  some  partial  or  changed  extent,  and  so  far  preventing,  by  the 


PEOPLE    EX    REL.    WINCHESTER    V.    COLEMAN    ET    AL.  3I 

intervention  of  an  expressed  command,  the  total  destruction  of  in- 
dividual liabilities  which  otherwise  would  flow  from  the  inherent 
effect  of  the  corporate  creation.  The  penalties  sometimes  imposed 
are  of  course  new  statutory  liabilities  which  never  at  common  law 
rested  upon  the  individual  members.  The  retained  liability  occa- 
sionally established  is  in  the  nature  and  a  parcel  of  such  original 
liability,  as  we  had  occasion  to  show  in  Rogers  v.  Decker  (131 
N.  Y.  490),  but  is  retained  by  force  of  the  express  command  of 
the  statute  and  in  that  manner  saved  from  the  destruction  which 
otherwise  would  follow  the  simple  creation  of  the  corporation. 
Ordinarily,  these  individual  liabilities  exist  upon  other  than  com- 
mon-law conditions,  and  make  the  corporators  rather  sureties  or 
guarantors  of  the  corporation  than  original  debtors,  since  in  gen- 
eral their  liability  arises  after  the  usual  remedies  against  the 
corporation  have  been  exhausted.  But  where  that  is  not  so,  the 
invariable  truth  is  that  the  creation  of  the  corporation  necessarily 
destroys  the  common-law  liability  of  the  individual  members  for 
its  debts,  and  requires  at  the  hands  of  the  creating  power  an 
affirmative  imposition  of  new  personal  liabilities  or  a  specific  re- 
tention of  old  ones  from  the  destruction  which  would  otherwise 
follow.  Exactly  the  opposite  is  true  of  joint-stock  companies. 
Their  formation  destroys  no  part  or  portion  of  their  common-law 
liability  for  the  debts  contracted.  Those  debts  are  their  debts 
for  which  they  must  answer.  Permission  to  sue  their  president 
or  treasurer  is  only  a  convenient  mode  of  enforcing  that  liability, 
but  in  no  manner  creates  or  saves  it.  The  statute  of  1853  did 
interfere  with  it.  That  act  required  in  the  first  instance  a  suit 
against  the  president  or  treasurer,  and  so  a  preliminary  exhaus- 
tion of  the  joint  property.  But  that  act  was  modal,  and  deter- 
mined the  procedure.  It  suspended  the  common-law  right,  but 
recognized  its  existence.  We  so  held  in  Witherhead  v.  Allen  (4 
y\bb.  Ct.  App.  Dec.  628),  and  at  the  same  time  said  that  the  asso- 
ciations were  not  corporations  but  mere  partnership  concerns. 
Even  that  mode  of  procedure  has  been  modified  by  the  Code 
(§§  1922,  1923),  so  that  the  creditor  at  his  option  may  sue  the 
associates  without  bringing  his  action  against  the  president  or 
treasurer.  These  last  and  quite  recent  enactments  show  that  the 
legislative  intent  is  still  to  preserve  and  not  destroy  the  original 
difference  between  the  two  classes  of  organizations ;  to  maintain 
in  full  force  the  common-law  liability  of  associates  and  not  to 
substitute  for  it  that  of  corporators ;  and  preserving  in  continued 
operation  that  normal  and  distinctive  difference,  to  evince  a  plain 
purpose  not  to  merge  the  two  organizations  in  one  or  destroy 
the  boundaries  which  separate  them.  That  intent,  once  clearly 
ascertained,  determines  the  construction  to  be  adopted,  and  may 
be  the  only  reliable  test  in  view  of  the  power  of  the  state  to  clothe 
one  organization  with  all  the  attributes  of  the  other.  The  drift 
of  legislation  has  been  to  lessen  and  obscure  the  original  and 
characteristic  difference.     On  the  one  hand  corporations  have  been 


22  DEFINITION    AND    CLASSIFICATION, 

created  with  positive  provisions  retaining  more  or  less  the  indi- 
vidual liability  of  the  members,  and  on  the  other  the  joint-stock 
companies  have  been  clothed  with  most  of  the  corporate  attributes, 
but  enough  of  the  original  difference  remains  to  show  that  our 
legislation  not  only  carefully  preserves  the  distinction  of  names, 
but  sufhcient,  also,  of  the  original  difference  of  character  and 
quality  to  disclose  a  clear  intent  not  to  merge  the  two. 

We  may  thus  see  upon  what  the  legislative  intent  to  preserve 
them  as  separate  and  distinct  is  founded  and  what  distinguishing 
characteristics  remain.  The  formation  of  the  one  involves  the 
merging  and  destruction  of  the  common-law  liability  of  the  mem- 
bers for  the  debts,  and  requires  the  substitution  of  a  new  or 
retention  of  the  old  liability  by  an  affirmative  enactment  which 
avoids  the  inherent  effect  of  the  corporate  creation ;  in  the  other, 
the  common-law  liability  remains  unchanged  and  unimpaired  and 
needing  no  statutory  intervention  to  preserve  or  restore  it;  the 
debt  of  the  corporation  is  its  debt  and  not  that  of  its  members, 
the  debt  of  the  joint-stock  company  is  the  debt  of  the  associates 
however  enforced;  the  creation  of  the  corporation  merges  and 
drowns  the  liability  of  its  corporators,  the  creation  of  the  stock 
company  leaves  unharmed  and  unchanged  the  liability  of  the 
associates ;  the  one  derives  its  existence  from  the  contract  of 
individuals,  the  other  from  the  sovereignty  of  the  state.  The  two 
are  alike  but  not  the  same.  More  or  less,  they  crowd  upon  and 
overlap  each  other,  but  without  losing  their  identity,  and  so,  while 
we  cannot  say  that  the  joint-stock  company  is  a  corporation,  we 
can  say  as  we  did  say  in  Van  Aernam  v.  Bleistein  (102  N.  Y. 
360),  that  a  joint-stock  company  is  a  partnership  with  some  of  the 
powers  of  a  corporation.  Beyond  that  we  do  not  think  it  is  our 
duty  to  go.     Order  affirmed.^ 

'  Compare  Hibbs  v.  Brown.  190  N.  Y.  167.— Ed. 


CHAPTER  11. 

THE    CREATION,    PERSONALITY,    AND    CITIZENSHIP    OF    CORPORATIONS. 

STATE  V.  DAWSON. 

1861.      16   Ind.   40. 

Special  Act — Acceptance  of  Charter. 

PERKINS,  J.:  Information  against  the  defendants,  charging 
that  they  are  pretending  to  be  a  corporation,  and  to  act  as  such, 
when  they  are  not  a  corporation.  It  charges  that  in  January, 
1849.  the  legislature  of  the  State  of  Indiana  enacted  a  special 
charter  of  incorporation  (which  is  set  out  at  length)  for  a  rail- 
road from  Fort  \\'ayne.  Indiana,  to  JeflFersonville,  to  be  called 
the  Fort  Wayne  and  Southern  Railroad;  that  the  persons  named 
in  the  charter  as  directors  did  not  accept  said  charter  till  June  2, 
1852.  when  they  did  meet  and  accept  the  same  and  organize 
under  it.  It  is  "alleged  that  the  defendants  are  assuming  to  act 
under  said  charter,  never  having  organized  under  any  other. 
The  court  below  sustained  a  demurrer  to  the  information;  thus 
holding  the  defendants  to  be  a  legal  corporation. 

The  present  constitution  of  Indiana  took  effect  on  November  i, 
185 1.     It  contains  these  provisions: 

"All  laws  now  in  force  and  not  inconsistent  with  this  Consti- 
tution shall  remain  in  force  until  they  shall  expire  or  be  re- 
pealed."    Sched.    (i   subsec.)    of  Const. 

"Corporations,  other  than  banking,  shall  not  be  created  by 
special  act,   but  mav  be   formed   under  general   laws."     Art.   II, 

§  13- 

"All  acts  of  incorporation  for  municipal  purposes  shall  con- 
tinue in  force  under  this  Constitution,  until  such  time  as  the 
General  Assembly  shall,  in  its  discretion,  modify  or  repeal  the 
same."     Sched.  supra,  subsec.  4. 

The  charter  for  the  Fort  Wayne  and  Southern  Railroad  was 
not  a  charter  for  municipal  purposes,  and  hence  was  not  specially 
continued  in  existence.  Art.  II.  §  13.  above  quoted,  prohibits 
the  creation  of  a  corporation  by  special  act  or  charter,  that  is, 
as  we  construe  the  prohibition,  through,  or  by  virtue  of,  such 
special  act  or  charter,  after  November  i,  1851.  The  policy  that 
induced  the  prohibition,  as  well  as  its  literal  import,  demands 
this  construction.  It  is  necessar}-  for  us  to  ascertain,  then,  when 
the  defendants,  if  ever,  were  created  a  corporation.  The  simple 
enactment  of  the  charter  for  the  corporation,  by  the  legislature, 
did  not  create  the  corporation.     It  required  one  act  on  the  part 

3 — Prwate  Corp.  33 


34      CREATION,    PERSONALITY,   AND   CITIZENSHIP   OF    CORPORATIONS. 

of  the  persons  named  in  the  charter  to  do  that,  viz.:  acceptance 
of  the  charter  enacted. 

Says  Grant,  in  his  work  on  Corporations,  vide  p.  13,  "Nor 
can  a  charter  be  forced  on  any  body  of  persons  who  do  not 
choose  to  accept  it."  And  again,  at  page  18,  he  says,  "The  funda- 
mental rule  is  this:  No  charter  of  incorporation  is  of  any  effect 
until  it  is  accepted  by  a  majority  of  the  grantees,  or  persons  who 
are  to  be  the  corporators  under  it.  Bagg's  Case,  2  Brownl.  & 
G.  100;  s.  c.  I  Roll.  Rep.  224;  Dr.  Askew's  Case,  4  Burr.  2200; 
Rutter  V.  Chapman,  8  M.  &  W.  25;  per  Wilmont,  J.,  Rex  v.  Vice- 
Chancellor  of  Cambridge,  3  Burr.  1661.  This  is  analogous  to 
the  general  rule  that  a  man  cannot  be  obliged  to  accept  the  grant 
or  devise  of  an  estate.  Townson  v.  Tickell,  3  B.  &  Aid.  31." 
See,  also,  Ang.  &  Am.  §  83,  where  it  is  said  if  a  charter  is  granted 
to  those  who  did  not  apply  for  it,  the  grant  is  said  to  be  in  fieri 
till  acceptance.  We  need  not  inquire  whether  this  rule  extends 
to  municipal  corporations  in  this  country.  As  to  what  may  con- 
stitute an  acceptance  we  are  not  here  called  on  to  decide,  as  the 
information  expressly  shows  that  there  was  none  in  this  case  till 
June.  i8q2,  which  fact  is  admitted  by  the  demurrer. 

The  grant  of  the  charter  in  question,  then,  t(5  those  who  had 
not  applied  for  it,  was  but  an  offer,  on  the  part  of  the  state;  a 
consent  that  the  persons  named  in  the  charter  might  become  a 
corporation,  might  be  created  such  an  artificial  being,  by  accept- 
ing the  charter  offered.  But  an  offer,  till  accepted,  may  be  with- 
drawn. In  this  case,  the  offer  made  by  the  state,  in  1849,  was 
withdrawn  by  the  state,  November  i,  1851,  by  then  declaring 
that  no  corporation,  after  that  date,  should  be  created  except 
pursuant  to  regulations  which  she,  in  future,  through  her  legis- 
lature would  prescribe. 

This  pretended  corporation,  then,  was  not  created  before 
November  i,  1851,  and  it  could  be  created  afterwards  only  by  the 
concurrent  consent  of  the  state  and  the  corporators.  But  at  that 
date,  the  constitution  prohibited  both  the  state  and  corporators 
from  giving  consent  to  such  a  corporation,  to  wit:  one  coming 
into  existence  through  a  special  charter;  and  hence  necessarily 
prohibited  the  creation  thereof.  This  decision  accords  with  that 
of  the  Supreme  Court  of  the  United  States  in  Aspinwall  v. 
Daviess  County,  22  How.  364;  where  it  was  held  that  the  new 
constitution  prohibited  a  subscription  of  stock  to  the  Ohio  and 
Mississippi  Railroad  Company,  authorized  by  the  charter  of  the 
corporation,  granted  under  the  former  constitution,  and  actually 
voted  by  the  people  of  the  county  under  that  constitution. 

Whether,  as  a  matter  of  fact,  the  charter  in  this  case  was 
accepted  under  the  old  constitution,  must  be  determined  on  a 
trial   of   the   cause  below. 

Had  the  provision  in  our  constitution,  like  that  on  this  subject 
in  the  constitution  of  Ohio,  ordained  that  the  legislature  should 
"pass  no  special  act  conferring  corporate  powers,"   the   restraint 


FRANKLIN    ItRIDGli    CO    V.    WOOD.  35 

would   clearly   have   been    imposed   alone   upon    future    legislative 
action;   but,   in   our  constitution,   the   restraint  is   plainly   imposed 
upon    the    creation,    the    organization,    of    the    corporation    itself. 
See  The  State  v.  Roosa,   ii   Ohio  St.   i6. 
Per  Curiam. — The  judgment  is  reversed,  with  costs. 


)(  FRANKLIN  BRIDGE  CO.  v.  WOOD. 

1853.     14  Ga.  80. 

General  Laws — Delegation   of  Legislative  Authority. 

This  was  an  action  on  a  subscription  to  stock.  The  defendant 
claimed  that  the  plaintiff  was  not  legally  incorporated,  and  that 
the  act  of  the  legislature  prescribing  the  mode  of  incorporating 
certain  corporations  was  unconstitutional. 

LUMPKIN,  J. :  Is  the  act  of  1843  and  that  of  1845,  amenda- 
tory thereof,  pointing  out  the  manner  of  creating  certain  corpo- 
rations and  defining  their  rights,  privileges,  and  liabilities,  uncon- 
stitutional ? 

By  the  first  section  of  the  Act  of  1843,  it  is  provided,  "That 
when  the  persons  interested  shall  desire  to  have  any  church, 
campground,  manufacturing  company,  trading  company,  ice  com- 
pany, fire  company,  theatre  company,  or  hotel  company,  bridge 
company,  and  ferry  company,  incorporated,  they  shall  petition  in 
writing  the  superior  or  inferior  court  of  the  county  where  such 
association  may  have  been  formed,  or  may  desire  to  transact 
business  for  that  purpose,  setting  forth  the  object  of  their  asso- 
ciation, and  the  privilege  they  desire  to  exercise,  together  with 
the  name  and  style  by  which  they  desire  to  be  incorporated;  and 
said  court  shall  pass  a  rule  or  order  directing  said  petition  to 
be  entered  of  record  on  the  minutes  of  said  court." 

Section  2  enacts  "That  when  such  rule  or  order  is  passed,  and 
said  petition  is  entered  of  record,  the  said  companies  or  associa- 
tions shall  have  power  respectively,  under  and  by  the  name 
designated  in  their  petition,  to  have  and  use  a  common  seal;  to 
contract  and  be  contracted  with;  to  sue  and  be  sued;  to  answer 
and  be  answered  unto  in  any  court  of  law  or  equitv;  to  appoint 
such  officers  as  they  may  deem  necessary ;  and  to  make  such  rules 
and  regulations  as  they  may  think  proper  for  their  own  govern- 
ment; not  contrary  to  the  laws  of  this  state;  but  shall  make  no 
contracts  or  purchase  or  hold  any  propertv  of  any  kind,  except 
•such  as  may  be  absolutely  necessarv  to  carry  into  effect  the  ob- 
ject of  their  incorporation.  Nothing  herein  contained  shall  be 
so  construed  as  to  confer  banking  or  insurance  privileges  on  anv 
company   or   association    herein    enumerated :    and    the^  individual 


36      CREATION,   PERSONALITY,   AND   CITIZENSHIP   OF   CORPORATIONS. 

members  of  such  manufacturing,  trading,  theatre,  ice,  and  hotel 
companies,  shall  be  bound  for  the  punctual  payment  of  all  the 
contracts  of  said  companies,  as  in  case  of  partnership." 

The  third  section  declares  that  "No  company  or  association 
shall  be  incorporated  under  this  act,  for  a  longer  period  than 
fourteen  years ;  but  the  same  may  be  renewed  whenever  neces- 
sary, according  to  the  provisions  of  the  first  section  of  this  act." 

The  fourth  section  confers  upon  the  superior  and  inferior  courts 
respectively,  the  power  to  change  the  names  of  individuals. 

Section  fifth.  "For  entering  any  of  said  petitions  and  orders, 
and  furnishing  a  certified  copy  thereof,  the  clerk  shall  be  entitled 
to  a  fee  of  five  dollars;  except  in  cases  of  applications  by  indi- 
viduals for  the  change  of  names, — in  which  case,  the  clerk  of  said 
court  shall  be  entitled  to  the  fee  of  one  dollar.  And  that  such 
certified  copy  shall  be  evidence  of  the  matters  therein  stated  in 
any  court  of  law  and  equity  in  this  state."  Cobb's  Digest,  542, 
543. 

By  the  act  of  1845  the  provisions  of  the  act  of  1843  are 
extended  to  all  associations  and  companies  whatever,  except 
banks  and  insurance  companies;  and  the  individual  members  of 
all  such  incorporations  are  made  personally  liable  for  all  the 
contracts  of  said  associations  or  companies.     Ibid. 

The  argument  against  the  validity  of  the  charter  of  the  Frank- 
lin Bridge  Company,  created  under  these  statutes,  is  this: 

1.  That  in  England  corporations  are  created  and  exist  by  pre- 
scription, by  Royal  Charter,  and  by  act  of  Parliament.  With  us 
they  are  created  by  authority  of  the  Legislature,  and  not  other- 
wise. That  to  establish  a  corporation  is  to  enact  a  law;  and 
that  no  power  but  the  legislative  body  can  do  this. 

2.  That  legislative  power  is  vested  under  our  Constitution,  in 
the  General  Assembly,  to  consist  of  a  Senate  and  House  of  Rep- 
resentatives, to  be  elected  at  stated  periods  by  the  citizens  of  the 
respective  counties. 

3.  And  that  the  General  Assembly  is  bound  to  exercise  the 
power  of  making  laws  thus  conferred  upon  them  by  the  people 
in  the  primordial  compact,  in  the  mode  therein  prescribed,  and  in 
none  other;  and  that  a  law  made  in  any  other  mode  is  unconsti- 
tutional and  void.  That  the  legislature  is  but  the  agent  of  their 
constituents ;  and  that  they  cannot  transfer  authority  delegated 
to  them  to  any  other  body,  corporate  or  otherwise, — not  even  to 
the  Judiciary,  a  co-ordinate  department  of  the  government,  unless 
expressly  empowered  by  the  Constitution  to  do  so.  That  to  do 
this  would  be  to  violate  one  of  the  fundamental  maxims  of  juris- 
prudence as  well  as  of  political  science,  namely,  delegata  potestas 
non  potest  delegari.  That  to  do  this  would  not  only  be  to  disre- 
gard the  constitutional  inhibition  which  is  binding  upon  the  rep- 
resentative, but  by  shifting  responsibility  introduce  innovations 
upon  our  system,  which  would  result  in  the  overthrow  and  ulti- 
mate destruction  of  our  political  fabric. 


FRANKLIN    BRIDGE    CO    V.    WOOD,  37 

The  constitutional  inquiry  thus  presented  is  an  exceedingly- 
grave  one.  It  reaches  far  beyond  the  case  made  in  the  bill  of 
exceptions,  and  extends  to  the  whole  range  of  topics  which  fall 
under  legislative  cognizance.  In  the  view  w^e  take  however  of  the 
statutes  before  us,  no  such  proposition  as  that  which  has  been 
discussed  is  presented  for  our  adjudication.  And  we  rejoice  that 
it  is  so,  not  only  on  account  of  the  delicacy  of  the  task,  in  pro- 
nouncing an  act  of  legislature  unconstitutional  and  void, — one 
which  is  never  justifiable  unless  the  case  is  clear  and  free  from 
doubt;  and  even  then  one  might  almost  be  forgiven  for  shrink- 
ing from  the  performance  of  a  duty  wdiich  would  be  productive 
of  such  incalculable  mischief  and  confusion.  Bridges  have  been 
built  at  a  heavy  expense;  manufacturing  and  innumerable  other 
associations  have  been  formed  in  Georgia,  and  are  in  full  opera- 
tion, under  charters  incorporated  under  this  law.  And  in  view  of 
the  consequences  any  court  might  hesitate,  unless  the  repugnance 
betw^een  the  statute  and  the  constitution  was  so  palpable  as  to 
admit  of  no  doubt,  and  produce  a  settled  conviction  of  their 
incompatibility  with  each  other, 

4.  It  was  formerly  asserted  that  in  England  the  act  of  incor- 
poration must  be  the  immediate  act  of  the  king  himself,  and  that 
he  could  not  grant  a  license  to  another  to  create  a  corporation. 
10  Reports,  o."].  But  Messrs.  Angell  and  Ames,  in  their  Treatise 
on  Corporations,  state  that  the  law  has  since  been  settled  to  the 
contrary;  and  that  the  king  may  not  only  grant  a  license  to  a 
subject  to  erect  a  particular  corporation,  but  give  a  general  power 
by  charter  to  erect  corporations  indefinitely,  on  the  principle 
that  qui  f acit  per  alium  facit  per  se ;  that  the  persons  to  whom 
the  power  is  delegated  of  establishing  corporations,  are  only  an 
instrument  in  the  hands  of  the  government.  I  Kyd,  50;  i  Black. 
Com. ;  Ang.  &  Am.  63. 

Before  the  revolution  charters  of  incorporation  were  granted 
by  the  proprietaries  of  Pennsylvania  under  a  derivative  authority 
from  the  Crown ;  and  those  charters  have  since  been  recognized 
as  valid.  3  Wilson's  Lectures,  409.  A  similar  power  has  been 
delegated  by  the  Legislature  of  Pennsylvania  with  regard  to 
churches.  7  S.  &  R.  517.  The  acts  of  the  instrument  in  these 
cases  become  the  acts  of  the  mover,  under  the  familiar  maxim 
above  mentioned.     See  also  i  Mo.  R.  5. 

5.  Our  opinion  is  that  no  legislative  power  is  delegated  to  the 
courts  by  the  acts  under  consideration.  There  is  simply  a  minis- 
terial act  to  be  performed — no  discretion  is  given  the  courts. 
The  duty  of  passing  the  rule  or  order  directing  the  petition  of  the 
corporators  to  be  entered  of  record  on  the  minutes  of  the  court, 
setting  forth  to  the  public  the  object  of  the  association  and  the 
privilege  they  desire  to  exercise,  together  with  the  name  and 
style  by  which  they  are  to  be  called  and  known,  is  made  obliga- 
tory upon  the  courts ;  and  should  they  refuse  to  discharge  it,  a 
mandamus  would   lie  to  coerce  them.     It  is  true  the  legislature 


38      CREATION^    PERSONALITY,   AND   CITIZENSHIP   OF    CORPORATIONS. 

has  seen  fit  to  use  the  courts  for  the  purpose  of  giving  legal  form 
to  these  companies.  But  it  might  have  been  done  in  any  other 
way.  Under  the  Free  Banking  Law  of  1838,  instead  of  petition- 
ing" the  court,  and  having  the  order  passed  and  entered  upon  its 
minutes,  the  certificate  specifying  the  name  of  the  association,  its 
place  of  doing  business,  the  amount  of  its  capital  stock,  the 
names  and  residence  of  the  shareholders,  and  the  time  for  which 
the  company  was  organized,  is  required  merely  to  be  proven  and 
acknowledged,  and  recorded  in  the  office  of  the  clerk  of  the 
superior  court,  where  any  office  of  the  association  is  established, 
and  a  copy  filed  with  the  Comptroller  General.  Cobb's  Digest, 
107,  108. 

And  so  under  the  act  of  1847.  authorizing  the  citizens  of  this 
state,  and  such  others  as  they  may  associate  with  them,  to  prose- 
cute the  business  of  manufacturing  with  corporate  powers  and 
privileges.  The  persons  who  propose  to-  embark  in  that  branch 
of  business  are  required  to  draw  up  a  'declaration  specifying  the 
objects  of  their  association  and  the  particular  branch  of  business 
they  intend  carrying  on,  together  with  the  name  by  which  they 
will  be  known  as  a  corporation,  and  the  amount  of  capital  to  be 
employed  by  them ;  which  declaration  is  required  to  be  first 
recorded  in  the  clerk's  office  of  the  superior  court  of  the  county 
where  such  corporation  is  located,  and  published  once  a  week  for 
two  months  in  the  two  nearest  gazettes ;  which  being  done,  it  is 
declared  the  said  association  shall  become  a  body  corporate  and 
politic,  and  known  as  such,  without  being  specially  pleaded,  in 
all  courts  of  law  and  equity  in  this  state,  to  be  governed  by  the 
provisions  and  be  subject  to  the  liabilities  therein  specified. 
Cobb's  Digest,  439,  440. 

In  these  two  instances,  and  others  which  might  be  cited,  the 
legislature  have  dispensed  with  the  action  of  the  courts,  or  of 
any  other  agency,  to  carry  out  their  enactments  with  regard  to 
the  various  associations  which  have  become  the  usual  and  favorite 
mode  of  conducting  the  industrial  pursuits  of  the  civilized  world 
in  modern  times. 

All  these  statutes  were  complete  as  laws  when  they  came  from 
the  hands  of  the  legislature,  and  did  not  depend  for  their  force 
and  efficacy  upon  the  action  or  will  of  any  other  power.  It  is 
true  that  they  could  only  take  effect  upon  the  happening  of  some 
event,  such  as  the  filing  the  petition  or  declaration,  and  giving 
publicity  to  the  purpose  of  the  association  in  the  mode  prescribed 
by  the  act.  But  if  this  were  a  good  reason  for  regarding  these 
statutes  as  invalid,  then  how  few  corporations  could  abide  the 
test !  For  it  requires  the  acceptance  of  the  charter  to  create  a 
corporate  body ;  for  the  government  cannot  compel  persons  to 
become  an  incorporate  body  wnthout  their  consent.  And  this 
consent,  either  express  or  implied,  is  generally  subsequent  in 
point  of  time  to  the  creation  of  the  charter.  And  yet,  no  charter 
that  we  are  aware  of  has  been  adjudged  invalid,  because  the  law 


BUTLER    PAPER    CO.    V.    CLl^lVELANU.  39 

creating  it  and  previously  defining  its  powers,  rights,  capacities, 
and  liabilities,  did  not  take  effect  until  the  acceptance  of  the  cor- 
porate body,  or  at  least  a  majority  of  them,  was   signified. 

The  result  therefore  of  our  deliberation  upon  this  case,  is  that 
the  Acts  of  1843  and  1845,  vesting  in  all  associations,  except  for 
banking  and  insurance,  the  power  of  self -incorporation,  do  not 
impugn  the  constitution,  and  that  the  charter  of  the  Franklin 
Bridge  Company  and  all  others  created  under  them,  and  in  con- 
formity to  their  provisions,  are  legal  and  valid.  With  the  policy 
of  these  statutes  we  have  nothing  to  do.  The  province  of  this 
and  all  other  courts  is  jus  dicere,  not  jus  dare.  Judgment  re- 
versed. 


BUTLER  PAPER  CO  v.  CLEVELAND. 

1906.     220  111.  128,  -/-J  N.  E.  99.  no  Am.  St.  Rep.  230. 

Dc   Jure    hicoi'poratioii — Directory   Provisions. 

MR.  JUSTICE  SCOTT  delivered  the  opinion  of  the  court. 

This  suit  was  brought  in  the  superior  court  of  Cook  county  by 
the  J.  W.  Butler  Paper  Company  against  Frederick  W.  Chamber- 
lain, Harold  I.  Cleveland  and  Harriet  F.  Cleveland,  to  recover 
the  sum  of  $1,305.80  alleged  to  be  due  the  plaintiff  for  merchan- 
dise sold  by  it  to  the  defendants  as  officers  and  directors  of  the 
C.  &  C.  Company,  a  corporation  organized  under  the  statute  of 
this  state.  Chamberlain  was  a  resident  of  the  state  of  Michiran, 
and  process  was  not  served  upon  him.  The  other  two  defendants 
entered  their  appearance  and  filed  the  general  issue  to  the  plain- 
tiff's declaration.  A  trial  was  had  before  the  court  without  a 
Jury,  by  agreement  of  the  parties,  upon  a  stipulation  of  facts,  and 
the  court  found  the  issues  in  favor  of  the  defendants,  and,  after 
overruling  a  motion  for  a  new  trial,  entered  judgment  against 
the  plaintiff  for  costs  of  suit.  The  plaintiff"  appealed  to  the  Ap- 
pellate Court  for  the  First  District,  and  that  court  having  affirmed 
the  judgment  of  the  superior  court,  a  further  appeal' has  been 
prosecuted  to  this  court. 

The  only  question  arising  upon  the  record  in  the  case,  which  is 
presented  by  certain  propositions  of  law  off'ered  by  the  plaintiff 
below  and  refused  by  tlie  court,  is  whether  there  was  such  a 
failure  to  comply  with  the  provisions  of  "An  act  concerning  cor- 
porations" (approved  April  18,  1872,  in  force  July  t,  1872),  in 
organizing  the  C.  &  C.  Company,  of  which  the  defendants  were 
officers  and  directors  at  the  time  the  merchandise  was  sold  bv  the 
plaintiff  to  the  C.  &  C.  Company,  as  to  render  the  defendants 
individually  liable  to  the  plaintiff  therefor  under  section  18  of 
chapter  32,  Hurd's  Revised  Statutes  of  1903.     That  section,  which 


40      CREATION,   PERSONALITY,   AND   CITIZENSHIP   OF    CORPOR.\TIONS. 

was  construed  by  this  court  in  Loverin  v.  McLaughlin,   i6i   111. 
417,  reads  as  follows : 

"If  any  person  or  persons  being,  or  pretending  to  be,  an  officer 
or  agent,  or  board  of  directors,  of  any  stock  corporation,  or  pre- 
tended stock  corporation,  shall  assume  to  exercise  corporate  pow- 
ers, or  use  the  name  of  any  such  corporation,  or  pretended  cor- 
poration, without  complying  with  the  provisions  of  this  act,  before 
all  stock  named  in  the  articles  of  incorporation  shall  be  subscribed 
in  good  faith,  then  they  shall  be  jointly  and  severally  liable  for 
all  debts  and  liabilities  made  by  them,  and  contracted  in  the  name 
of  such  corporation  or  pretended  corporation." 

The  sole  ground  relied  upon  by  the  plaintiff  as  showing  a  de- 
fective incorporation  of  the  C.  &  C.  Company  is  the  fact  that  the 
meeting  of  the  subscribers  to  the  capital  stock  of  the  company, 
held  for  the  purpose  of  electing  directors  and  for  the  transaction 
of  such  other  business  as  might  come  before  them,  was  not  called 
in  the  manner  pointed  out  by  the  statute. 

Section  3  of  chapter  32,  supra,  provides  that  notice  of  such 
meeting  shall  be  given  "by  depositing  in  the  postoffice  properly 
addressed  to  each  subscriber,  at  least  ten  days  before  the  time 
fixed,  a  written  or  printed  notice,  stating  the  object,  time  and 
place  of  such  meeting." 

Frederick  W.  Chamberlain,  Harold  I.  Cleveland  and  Harriet  F. 
Cleveland  were  the  only  subscribers  to  the  capital  stock  of  the 
C.  &  C.  Company.  The  license  to  open  books  of  subscription  to 
the  capital  stock  of  the  company  was  issued  on  December  10, 
1902.  On  December  12,  1902,  the  three  subscribers  above  named 
executed  a  written  instrument  by  w^iich  they  waived  the  notice 
provided  for  by  section  3,  supra,  and  requested  the  commissioners 
to  convene  the  meeting  at  12  o'clock,  noon,  of  that  day  at  Room 
913,  jNIonadnock  block,  in  the  city  of  Chicago,  for  the  purpose 
of  electing  directors  and  transaction  of  such  other  business  as 
might  come  before  them.  Prior  to  the  meeting,  in  pursuance  of 
this  written  instrument,  a  notice  was  personally  delivered  to  each 
of  the  three  subscribers,  notifying  them  of  the  object,  time  and 
place  of  the  meeting.  The  subscribers  met  at  the  time  and  place 
specified  and  elected  a  board  of  directors,  consisting  of  themselves 
and  George  A.  ]\Iiller,  who  was  one  of  the  commissioners  to 
whom  the  license  had  been  issued  by  the  Secretary  of  State. 

A  decision  of  this  case  depends  upon  the  question  w^hether  the 
C.  &  C.  Company  is  a  corporation  de  jure.  Proof  of  a  corpora- 
tion de  facto  does  not  relieve  the  directors  and  officers  of  the 
corporation  from  the  liability  imposed  by  section  18,  supra.  _  There 
must  be  a  corporation  de  jure  in  order  to  escape  that  liability. 
Loverin  v.  McLaughlin,  161  111.  417;  Gunderson  v.  Illinois  Trust 
and  Savings  Bank,   199  Id.  422. 

The  statute  prescribes  a  certain  course  to  be  pursued  in  organ- 
izing a  corporation  in  this  state.  It  does  not  necessarily  follow, 
however,  that  any  departure  from  that  course  will  prevent  a  cor- 


BUTLER    PAPER    CO.    V.    CLEVELAND.  4I 

poration  from  becoming  one  de  jure.  Whether  or  not  such  de- 
parture will  have  that  effect  depends  upon  the  nature  of  the  pro- 
vision which  is  violated.  If  it  is  a  mandatory  provision,  a  failure 
to  substantially  comply  with  its  terms  will  prevent  the  corpora- 
tion from  becoming  one  de  jure;  but  if  the  provision  is  merely 
directory,  then  a  departure  therefrom  will  not  have  that  conse- 
quence. 

In  Cooky's  Constitutional  Limitations  (star  page  78)  it  is  said: 
"Those  directions  which  are  not  of  the  essence  of  the  thing  to  be 
done,  but  which  are  given  with  a  view  merely  to  the  proper,  or- 
derly and  prompt  conduct  of  the  business,  and  by  a  failure  to 
obey  which  the  rights  of  those  interested  will  not  be  prejudiced, 
are  not  commonly  to  be  regarded  as  mandatory ;  and  if  the  act  is 
performed,  but  not  in  the  time  or  in  the  precise  mode  indicated, 
it  may  still  be  sufficient,  if  that  which  is  done  accomplishes  the 
substantial  purpose  of  the  statute." 

The  provision  of  the  statute  here  under  consideration,  requiring 
notice  of  the  first  meeting  to  be  given  to  the  subscribers  to  the 
capital  stock  of  a  corporation  being  organized,  by  mailing  to  them 
notices  stating  the  object,  time  and  place  of  such  meeting  at  least 
ten  days  before  the  time  fixed  for  such  meeting,  is  evidently  in- 
tended only  as  a  direction  "given  with  a  view  merely  to  the 
proper,  orderly  and  prompt  conduct"  of  the  commissioners  in 
calling  such  meeting,  and  a  failure  to  obey  that  provision  will  not 
prejudice  the  rights  of  any  persons  interested  therein  if  the  same 
result  is  reached  in  some  other  mode.  The  only  persons  interested 
in  the  result  to  be  attained  by  giving  notice  of  the  object,  time 
and  place  of  a  meeting  of  the  subscribers  to  the  capital  stock  of 
a  corporation  for  the  purposes  specified  in  the  statute  are  the 
subscribers  themselves.  We  perceive  no  reason  why  such  persons, 
where  all  agree  thereto,  may  not  waive  the  giving  of  the  statutory 
notice,  if  the  meeting  is  actually  held,  as  the  purpose  of  the  stat- 
ute in  requiring  the  notices  to  be  given  has  in  such  case  been 
accomplished. 

The  mere  fact  that  the  word  "shall"  is  used  in  the  statute  in 
providing  for  the  notice  does  not  render  the  provision  mandatory. 
Canal  Commissioners  v.  Sanitary  District,  184  111.  597. 

In  the  case  of  Newcomb  v.  Reed,  12  Allen  (Mass.),  362,  in 
discussing  the  effect  upon  the  legality  of  a  corporation  where  the 
call  for  the  first  meeting  was  signed  by  only  one  of  the  persons 
named  in  the  act  of  incorporation  instead  of  by  a  majority  of 
such  persons,  as  required  by  the  statute  of  Massachusetts,  the 
court  said :  "The  organization  was  not  strictly  regular,  but  can 
hardly  be  considered  even  as  defective.  And  if  the  object  of  the 
statute  is  regarded,  by  which  it  is  required  that  the  first  meeting 
shall  be  called  by  a  majority  of  the  persons  named  in  the  act  of 
incorporation,  it  will  be  evident  that  it  is  directory,  merely,  and 
only  designed  to  secure  the  rights  conferred  by  the  charter  to 
those  to  whom  it  was  granted,  among  themselves,  by  providing 


42       CREATION,    PERSONALITY,    AND    CITIZENSHIP   OF    CORPORATIONS. 

an  orderly  method  of  organization.  Thus,  if  all  the  persons  in- 
terested should  come  together  without  any  notice  or  call  whatever, 
and  proceed  to  accept  the  charter  and  do  the  other  acts  necessary 
to  constitute  the  corporation,  we  cannot  doubt  that  their  action 
would  be  valid,  and  that  neither  the  public,  nor  any  persons  not 
belonging  to  the  association,  would  have  any  interest  to  question 
their  proceedings.  The  purpose  of  the  statute  was  probably  to 
avoid  such  difficulties  as  were  disclosed  in  the  case  of  Lechmere 
Bank  v.  Boynton,  ii  Cush.  369,  where  two  parties  had  attempted 
to  organize  separately  under  the  same  charter,  each  claiming  to 
be  the  corporation." 

Cases  have  also  arisen  in  this  state  in  which  the  eflFect  of  a 
failure  to  give  notice  of  corporate  meetings  in  the  manner  pro- 
vided by  statute  have  been  considered  and  it  has  been  uniformly 
held  that  it  is  immaterial  whether  or  not  such  notice  has  been 
given  in  the  manner  pointed  out  by  the  statute,  if  the  persons  en- 
titled to  such  notice  actually  attend  the  meeting  and  participate 
in  the  business  there  transacted.  Thomas  v.  Citizens'  Horse  Rail- 
way Co.,  104  111.  462;  Gade  v.  Forest  Glen  Brick  Co.,  165  Id.  367. 

This  case  is  distinguishable  from  Loverin  v.  McLaughlin,  supra, 
which  is  relied  upon  by  appellant,  in  that  notice  of  the  first  meet- 
ing of  subscribers  is  not  intended  for  the  benefit  of  the  public, 
as  no  publicity  of  such  meeting  is  required,  but  is  merely  for  the 
benefit  of  the  subscribers,  while  in  the  Loverin  case  the  provision 
which  was  not  complied  with  was  that  requiring  the  certificate 
of  complete  organization  issued  by  the  Secretary  of  State  to  be 
filed  and  recorded  in  the  office  of  the  recorder  of  deeds  of  the 
county  in  which  the  principal  office  of  the  corporation  is  located, 
and  a  compliance  with  the  statute  in  that  regard  was  essential 
because  the  provision  was  one  for  the  benefit  of  the  public,  and 
could  not  be  waived. 

It  is  urged  that  the  fact  that  section  4  of  the  act  in  question 
requires  a  copy  of  the  notice  provided  for  by  section  3,  supra,  to 
be  included  in  the  report  made  to  the  Secretary  of  State,  shows 
that  the  statute  contemplates  compliance  with  the  statute  in  regard 
to  giving  notice.  We  think  this  provision  is  fully  satisfied  by 
including  in  such  report  the  written  instrument  signed  by  all  the 
subscribers  in  which  such  notice  is  waived. 

The  superior  court  did  not  err  in  refusing  the  propositions  of 
law  and  in  entering  judgment  upon  the  stipulation  of  facts  in 
favor   of  the  defendants   and   against  the  plaintiff   for  costs. 

The  judgment  of  the  Appellate  Court  will  be  affirmed. 

Judgment  affirmed.^ 

^  Mokelumne  &c.  Mining  Co.  v.  Woodbury  (1859).  14  Cal.  424;  Hum- 
phreys V.  Mooney  (1880)  5  Colo.  282;  Newcomb  v.  Reed  (1866)  12 
Allen   (Mass.)  362,  Accord. 

The  general  incorporation  laws  required  the  insertion  in  the  articles 
of  the  number  and  names  of  the  directors.  These  were  omitted.  Held, 
the    provision    was    imperative    and    not    merely    directory   and    that    the 


WILLMOTT    V.    LONDON    ROAD    CAR    CO.,    LIMITED.  43 

WILLMOTT  V.  LONDON  ROAD  CAR  COMPANY, 

LIMITED. 

1910.     2  Chan.  Div.  525. 

Appeal  from  a  decision  of  Neville,  J.^ 

By  a  lease,  dated  May  31,  1900,  the  plaintiff  granted  a  certain 
land  and  buildings  at  Putney  to  one  Porter  for  a  term  of  sixty- 
two  and  a  half  years  from  September  29,  1899,  at  the  yearly 
rent  of  95/  los,  and  Porter  for  himself,  his  executors,  adminis- 
trators, and  assigns  covenanted  (among  other  things)  to  use  the 
premises  for  the  business  of  a  jobmaster  and  livery  stable  keeper, 
and  not  without  the  previous  written  consent  of  the  plaintiff 
or  his  heirs  or  assigns  to  assign  or  underlet  or  part  with  the 
possession  of  the  premises  or  any  part  thereof,  but  such  consent 
was  not  to  be  withheld  "in  respect  of  a  respectable  or  responsi- 
ble person ;"  and  the  lease  contained  the  usual  power  of  re- 
entry on  breach  of  any  of  the  covenants  therein  contained. 

In  February.  1901,  the  lease  was,  with  the  plaintiff's  consent, 
assigned  to  the  defendants,  who  entered  into  and  took  possession 
of  the  premises  under  the  lease. 

In  1908  the  defendants  sold  their  undertaking  and  property  to 
the  London  General  Omnibus  Company.  Limited,  and  in  Decem- 
ber, 1908,  the  defendants  applied  to  the  plaintiff  for  leave^  to 
assign  the  lease  to  that  company.  On  April  9,  1909.  the  plaintiff* 
refused  to  give  his  consent  to  the  assignment.  In  the  following 
July  the  defendants,  without  the  plaintiff's  consent,  let  the  Lon- 
don General  Omnibus  Company,  Limited,  into  possession  of  the 
premises  in  the  lease.  Thereupon  the  plaintiff  commenced  this 
action  and  claimed  a  declaration  that  was  entitled  to  re-enter  and 
recover  possession  of  the  demised  premises  as  on  a  forfeiture  of 
the  said  lease  by  reason  of  (inter  alia),  the  defendants  having 
without  his  written  consent  parted  with  the  possession  of  the 
premises  to  the  omnibus  company  on  the  ground  that  that  com- 
pany was  not  "a.  person"  within  the  meaning  of  the  aforesaid 
covenant  in  the  lease. 

The  defendants  alleged  in  their  defense  that  the  London  Gen- 
eral Omnibus  Company,  Limited,  was  "a  respectable  and  respon- 
sible person"  within  the  meaning  of  those  words  in  the  lease,  and 
counterclaimed  for  a  declaration  that  they  were  entitled  to  assign 
the  said  premises  to  the  omnibus  company  without  the  further 
application  to  or   receiving  the   consent  of  the   plaintiff. 

Neville,  J.,  held,  following  Harrison.  Ainslie  &  Co.  v.  Barrow- 
in-Furness  Corporation,-  that  a  corporation  was  not  capable  of 
being  "a  respectable  and  responsible  ])erson"  within  the  meaning 

plaintiff  company  could  not  recover  upon   a   subscription  to  its  capital 
stock.     Reed  v.  Richmond  St.  Ry.  Co.   (1875)  50  Tnd.  342.— Ed. 

^  [1910]  1  Ch.  754. 

'63  L.  T.  834. 


44      CREATION,    PERSONALITY,   AND   CITIZENSHIP   OF    CORPORATIONS, 

of   the   covenant,   and   that   the   plaintiff  was   entitled   to   recover 
possession. 

The  defendants  appealed. 

COZEXS-Hx\RDY,  U.  R.— This  is  an  appeal  from  a  judgment 
of  Neville,  J.,  by  which  he  has  declared  that  the  London  General 
Omnibus  Company,  being  a  corporation,  is  not  a  respectable  and 
responsible  person  within  the  meaning  of  a  covenant  contained  in 
a  lease,  which  I  will  read  in  a  moment,  and  has  declared  that  the 
lessor  is  entitled  to  recover  possession  of  the  demised  premises. 
The  appeal  raises  a  question  undoubtedly  of  importance  and  un- 
doubtedly, too,  in  my  judgment,  of  difficulty.  Two  learned  judges, 
Romer,  J.,  and  Neville,  J.,  have  taken  a  view  which,  with  the 
utmost  respect,  I  am  able  to  accept.  The  lease  was  a  lease 
granted  in  1900  to  a  ]Mr.  Porter  of  some  premises  at  Putney. 
The  rent  was  95/  a  year.  The  property  was  insured  for  5000/; 
it  was  a  valuable  property  apparently,  and  the  lease  contained 
this  covenant.  [His  Lordship  read  the  covenant.]  Mr.  Porter 
did  assign  to  the  present  defendants,  the  London  Road  Car  Com- 
pany, in  1901,  and  the  plaintiff  gave  his  consent  to  the  assign- 
ment. The  defendants  were  minded  to  assign  to  the  London 
General  Omnibus  Company.  It  is  quite  immaterial,  but  we  are 
told  that  the  assignment  was  a  part  of  a  scheme  of  reconstruction. 

The  real  question,  and  the  only  question  which  has  been  de- 
cided bv  Neville,  J.,  is  that  in  his  view  a  corporation  is  not  a 
"person"  and  cannot  be  a  "responsible  and  respectable  person" 
within  the  meaning  of  this  covenant.  I  think  it  is  necessary  to 
consider  with  some  care  what  is  the  true  prima  facie  meaning  of 
the  word  "person" — what  is  its  meaning  at  common  law  and 
apart  from  any  statutory  enactment.  I  go  back  to  Lord  Coke 
and  his  exposition  of  the  statute  of  39  Eliz.  c.  5.  The  language 
of  the  statute  there  was  quite  positive.  It  was  a  statute  that  all 
and  every  person  and  persons  seised  of  an  estate  in  fee  simple 
might — I  am  stating  the  substance  of  the  act  very  shortly — 
found  hospitals  or  almshouses,  and  Lord  Coke  upon  those  words 
"all  and  every  person  and  persons"  says  this  (2d  Inst.  (1797  ed.) 
p.  722)  :  "These  words  regularly  doe  extend  to  any  body  politick 
or  corporate,  but  not  to  such  as  are  restrained  by  an  Act  of  Par- 
liament to  alien,  etc.,  but  doth  extend  to  such  bodies  politick  and 
corporate  as  may  alien."  He  does  not  put  that  on  any  context 
in  the  act — on  the  contrary,  there  is  no  context — but  he  puts  it 
as  a  general  proposition.  "These  words  regularly  doe  extend 
to  any  body  politick  or  corporate  such  as  may  alien."  Of  course, 
a  corporation  which  had  no  power  of  alienation  could  not  be 
a  person  within  the  meaning  of  this  act,  which  says  that  any  per- 
son may  alien.  It  did  not  authorize  an  act  which  was  otherwise 
ultra  vires.  Then  we  come  to  Blackstone's  authority.  The 
passage  which  was  read  by  Farwell,  L.  J.,  from  the  commentaries 
(i   123)   is  quite  explicit.     "Persons  are  divided  by  the  law  into 


WILLMOTT    V.    LONDON    ROAD    CAR    CO.,    LIMITED.  45 

either  natural  persons,  or  artificial."  Then,  again,  we  come  to 
the  very  important  case  of  Pharmaceutical  Society  v.  London  and 
Proz'incial  Supply  Association^  in  the  House  of  Lords.  Lord 
Selborne,  in  language  which  I  think  is  perfectly  unambiguous, 
said  that  prima  facie  in  a  statute  the  word  "person"  would  in- 
clude an  artificial  person  or  a  corporation.  Lord  Blackburn  in- 
dicated the  same  view,  although  he  said  he  was  not  so  clear  about 
it.  It  is  said,  true,  that  may  be  so  as  to  statutes,  but  that  is  a 
construction  which  is  limited  to  statutes ;  it  has  no  application  to 
instruments  even  of  the  most  formal  character  under  seal  such 
as  this  lease  is.  Is  there  any  authority  for  that?  So  far  as  I 
am  aware,  there  is  not.  Is  there  any  authority  to  the  contrary 
of  that?  I  think  there  is,  for  Chitty,  J.'s  decision  in  In  re  Jeff- 
cock's  Trusts,*  which  was  a  case  of  a  will,  shews  that  where  trus- 
tees of  a  will  have  power  given  to  them  to  grant  leases  to  any 
person  or  persons  as  they  may  think  fit,  a  limited  company,  that 
is  to  say,  a  corporation  is,  within  the  meaning  of  that  power,  a 
person  to  whom  the  trustees  may  lawfully  and  properly  grant  a 
lease.  I  am  not  aware  that  the  precise  point  has  arisen  with  ref- 
erence to  a  lease,  but  certainly  I  should  be  most  unwilling  to 
draw  a  distinction  which  I  think  would  be  contrary  to  the  whole 
trend  of  modern  dealings,  and  to  say  that  a  corporation  in  a  lease 
of  this  kind  was  not  to  be  regarded  as  a  person.  The  real  stress 
of  Mr.  Peterson's  and  Mr.  Draper's  able  arguments  rested  on  the 
words  "responsible  and  respectable."  Let  me  take  them  one  by 
one.  It  is  plain,  of  course,  that  under  this  lease  and  apart  from 
this  covenant  a  company  could  be  an  assign  of  the  lease.  There 
is  no  dispute  about  that.  It  was  not  ultra  vires  of  the  com- 
pany to  accept  a  lease  and  it  w^as  perfectly  competent  to  become 
an  assign.  Suppose  the  words  had  simply  been  that  consent 
should  not  be  withheld  in  the  case  of  a  responsible  person,  I 
cannot  bring  myself  to  doubt  that  in  that  case  a  company  which 
admitted  to  be  responsible  in  the  sense  of  being  able  to  discharge 
all  obligations  in  respect  of  rent  and  covenants  under  the  lease 
would  be  a  responsible  person  within  the  meaning  of  the  cove- 
nant, and  therefore  a  person  with  respect  to  whom  consent  could 
not  be  refused.  But  then  it  is  said,  and  this  is  the  point  which 
alone  has  given  me  difficulty  in  this  case,  "Can  it  be  said  that  a 
corporation  can  be  respectable?  Does  not  the  addition  of  that 
word  'respectable'  compel  you  to  say  that  in  this  case  the  word 
'person'  must  be  limited  to  an  individual,  a  human  personality,  a 
person  who  is  capable  of  acts,  moral  or  immoral?  In  my  opinion 
that  is  not  so.  I  think  the  ordinary  use  of  language  justifies  you 
in  saying  that  a  company  is  a  respectable  company.  We  all  use 
that  language  habitually ;  we  talk  of  a  respectable  insurance  com- 
pany, or  a  respectable  bank,  and  in  that  case  we  refer  to  the 
mode  In  which  the  company  or  the  bank  conducts  its  business. 

"5  App.  Cas.  857. 
*51  L.  J.  (Ch.)  507. 


46      CREATION,    PERSONALITY,   AND   CITIZENSHIP   OF    CORPORATIONS. 

But  I  think  we  are  not  without  assistance  from  authority  which 
is  absolutely  binding  on  us.  A  limited  company  or  a  company 
whether  limited  or  not  can  maintain  an  action  of  libel  for  an 
injury  to  its  reputation  without  proving  any  special  damage. 
South  Hetton  Coal  Co.  v.  North  Eastern  Neivs  Association,^ 
which  is  a  decision  of  this  court  in  1893,  is  a  clear  authority  on 
that  point.  The  material  passages  of  the  judgment  have  been 
read,  and  I  do  not  propose  to  read  them  again.  I  am  content  to 
rely  on  a  passage  there  quoted  from  the  judgment  of  Pollock,  C. 
B.  in  Metropolitan  Saloon  Omnibus  Co.  v.  Hawkins,^  where  he 
says  that  in  order  to  carry  on  business  it  is  necessary  that  the 
reputation  of  a  corporation  should  be  protected,  and  therefore  in 
cases  of  libel  and  slander  it  must  have  a  remedy  by  action.  A 
company  can  have  a  reputation  which  is  not  the  reputation  of  the 
individual  directors,  but  the  reputation  of  the  company,  the  repu- 
tation which  the  company  itself,  and  itself  alone,  can  protect 
by  means  of  an  action  of  libel.  Are  we  to  draw  a  distinction 
and  say,  "True,  that  might  be  applicable  if  the  word  in  the 
covenant  had  been  'reputable,'  but  it  is  not  'reputable,'  but 
'respectable?'"  I  decline  to  draw  that  fine  distinction.  It  seems 
to  me  that  the  better  view  (which  I  think  is  in  accordance  with 
modern  policy  and  the  trend  of  all  mercantile  proceedings)  is  to 
say  that  a  company  in  a  clause  of  this  kind  is  a  person  who  may 
be  both  respectable  and  responsible,  and  that  therefore  there  can 
be  no  right  to  refuse  to  assign  it.  In  other  words,  I  think,  tak- 
ing the  whole  context  of  this  clause  that  it  really  amounts  to  this : 
"You  shall  not  assign  or  underlet  without  my  previous  consent, 
but  such  consent  shall  not  be  withheld  in  the  event  of  the  con- 
templated assignee  or  underlessee,  who  might  be  an  incorporated 
company,  being  a  respectable  and  responsible  person,"  the  word 
"person"  being  there  used  as  a  term  which  is  equally  applicable 
to  an  artificial  and  to  a  natural  person. 

I  am  aware  that  the  view  I  am  taking  in  this  case  is  contrary 
to  that  expressed  by  Romer,  J.,  in  Harrison,  Ainslie  &  Co.  v. 
Barrow-in-Furness  Corporation.^  That  decision  may  have  been 
right  on  other  grounds,  as  to  which  I  say  nothing,  but  the  learned 
judge,  from  whom  I  never  dififer  but  with  great  hesitation,  says 
this:  "No  doubt,  for  many  purposes,  the  word  'person'  includes 
corporation,  as,  for  example,  for  the  purposes  of  the  Convey- 
ancing Act  1881.  The  question  I  have  to  decide  is,  whether,  look- 
ing at  this  particular  lease,  I  can  hold  that  a  corporation  such  as 
that  of  Barrow-in-Furness  falls  within  the  definition  of  'a  person 
of  responsibility  and  respectability.'  I  think  not.  Although  the 
word  'person'  may  under  many  circumstances  and  for  many  pur- 
poses include  a  corporation,  I  do  not  think  that  is  prima  facie 
the  natural  meaning  of  the  word,  but  whether  that  be  so  or  not, 

•  11894]  1  Q.  B.  133. 

*  [18591  4  H.  &  N.  87,  90. 
'  63  L.  T.  834,  836. 


LOUISVILLE,    ETC.,    R.    CO.    V.    LETSON.  47 

I  have  here  to  deal  with  a  clause  about  a  person  of  responsibility 
and  respectability.  Looking  at  the  phrase  as  a  whole,  and  con- 
sidering the  terms  of  the  lease,  I  do  not  hold  that  the  corporation 
can  be  said  to  come  within  the  fair  meaning  of  these  words." 
With  that  decision  before  him,  I  think  that  Neville,  J.,  was  per- 
fectly right  in  giving  the  decision  which  he  did,  following  the 
decision  of  a  judge  of  co-ordinate  jurisdiction  and  leaving  the 
parties  to  come  to  the  Court  of  Appeals;  but  having  arrived  at 
a  clear  opinion  in  my  own  mind  that  both  those  decisions  are 
wrong,  I  think  that  the  only  course  open  to  us  is  to  say  that  this 
appeal  must  be  allowed  and  the  action  dismissed  with  costs  here 
and  below. 


LOUISVILLE,  ETC.,  R.  CO.  v.  LETSON. 

1844.     2  How.  (U.  S.)  497,  II  L.  ed.  353. 

Corporation  as  a  Citizen 

Error  to  the  circuit  court  of  the  United  States  for  the  district 
of  South  Carolina,  in  an  action  of  covenant  brought  by  Letson. 
a  citizen  of  New  York,  against  the  Louisville,  Cincinnati  and 
Charleston  Railroad  Co.,  a  South  Carolina  corporation. 

The  defendants  filed  a  plea  to  the  jurisdiction.  A  general  de- 
murrer to  this  plea  was  sustained  and  defendant  appealed. 

MR.  JUSTICE  WAYNE   delivered  the  opinion  of  the  court. 

The  jurisdiction  of  the  court  is  denied  in  this  case  upon  the 
grounds  that  two  members  of  the  corporation  sued  are  citizens  of 
North  Carolina ;  that  the  state  of  South  Carolina  is  also  a  mem- 
ber, and  that  two  other  corporations  in  South  Carolina  are  mem- 
bers, having  in  them  members  who  are  citizens  of  the  same  state 
with  the  defendant  in  error.     *     *     * 

A  suit  then  brought  by  a  citizen  of  one  state  against  a  corpora- 
tion by  its  corporate  name  in  the  state  of  its  locality,  by  which 
it  was  created  and  where  its  business  is  done  by  any  of  the  cor- 
porators who  are  chosen  to  manage  its  affairs,  is  a  suit,  so  far  as 
jurisdiction  is  concerned,  between  citizens  of  the  state  where  the 
suit  is  brought  and  a  citizen  of  another  state.  The  corporators 
as  individuals  are  not  defendants  in  the  suit,  but  they  are  parties 
having  an  interest  in  the  result,  and  some  of  them  being  citizens 
of  the  state  where  the  suit  is  brought,  jurisdiction  attaches  over 
the  corporation — nor  can  we  see  how  it  can  be  defeated  by  some 
of  the  members,  w^ho  cannot  be  sued,  residing  in  a  different  state. 
It  mav  be  said  that  the  suit  is  against  the  corporation,  and  that 
nothing  must  be  looked  at  but  the  legal  entity,  and  then  that  we 
cannot  view  the  members  except  as  an  artificial  aggregate.  This 
is  so,  in  respect  to  the  subject  matter  of  the  suit  and  the  judg- 
ment which  may  be  rendered;  but  if  it  be  right  to  look  to  the 


48      CREATION,    PERSONALITY,   AND   CITIZENSHIP  OF   CORPORATIONS. 

members  to  ascertain  whether  there  be  jurisdiction  or  not,  the 
want  of  appropriate  citizenship  in  some  of  them  to  sustain  juris- 
diction, can  not  take  it  away,  when  there  are  other  members  who 
are  citizens,  with  the  necessary  residence  to  maintain  it. 

But  we  are  now  met  and  told  that  the  cases  of  Strawbridge  and 
Curtis,  3  Cranch,  267,  and  that  of  the  Bank  of  the  United  States 
and  Deveaux,  5  Cranch,  84 — hold  a  different  doctrine. 

We  do  not  deny  that  the  language  of  those  decisions  does  not 
justify  in  some  degree  the  inferences  which  have  been  made  from 
them,  or  that  the  effect  of  them  has  been  to  limit  the  jurisdiction 
of  the  circuit  courts  in  practice  to  the  cases  contended  for  by  the 
counsel  for  the  plaintiff  in  error.  The  practice  has  been,  since 
those  cases  were  decided,  that  if  there  be  two  or  more  plaintiffs 
and  two  or  more  joint-defendants,  each  of  the  plaintiffs  must  be 
capable  of  suing  each  of  the  defendants  in  the  courts  of  the 
United  States  in  order  to  support  the  jurisdiction,  and  in  cases 
of  corporations  to  limit  jurisdiction  to  cases  in  which  all  the 
corporators  were  citizens  of  the  state  in  which  the  suit  is  brought. 
The  case  of  Strawbridge  and  Curtis  was  decided  without  argu- 
ment. That  of  the  Bank  and  Deveaux  after  argument  of  great 
ability.  But  never  since  that  case  has  the  question  been  presented 
to  this  court,  with  the  really  distinguished  ability  of  the  argu- 
ments of  the  counsel  in  this — in  no  way  surpassed  by  those  in 
the  former.  And  now  we  are  called  upon  in  the  most  imposing 
way  to  give  our  best  judgments  to  the  subject,  yielding  to  decided 
cases  everything  that  can  be  claimed  for  them  on  the  score  of 
authority  except  the  surrender  of  conscience. 

After  mature  deliberation,  we  feel  free  to  say  that  the  cases  of 
Strawbridge  and  Curtis  and  that  of  the  Bank  and  Deveaux  were 
carried  too  far,  and  that  consequences  and  inferences  have  been 
argumentatively  drawn  from  the  reasoning  employed  in  the  latter 
which  ought  not  to  be  followed.  Indeed,  it  is  difficult  not  to  feel 
that  the  case  of  the  Bank  of  the  United  States  and  the  Planters' 
Bank  of  Georgia  (9  Wheat.  Q07)  is  founded  upon  principles 
irreconcilable  with  some  of  those  on  which  the  cases  already  ad- 
verted to  were  founded.  The  case  of  the  Commercial  Bank  of 
Vicksburg  and  Slocomb  (14  Peters,  60)  was  most  reluctantly 
decided  upon  the  mere  authority  of  those  cases.  We  do  not  think 
either  of  them  maintainable  upon  the  true  principles  of  interpre- 
tation of  the  Constitution  and  the  laws  of  the  United  States.  A 
corporation  created  by  a  state  to  perform  its  functions  under  the 
authority  of  that  state  and  only  suable  there,  though  it  may  have 
members  out  of  the  state,  seems  to  us  to  be  a  person,  though  an 
artificial  one,  inhabiting  and  belonging  to  that  state,  and  therefore 
entitled,  for  the  purpose  of  suing  and  being  sued,  to  be  deemed 
a  citizen  of  that  state.  We  remark,  too,  that  the  cases  of  Straw- 
bridge  and  Curtis  and  the  Bank  and  Deveaux  have  never  been 
satisfactory  to  the  bar,  and  that  they  were  not,  especially  the 
last,  entirely  satisfactory  to  the  court  that  made  them.     They  have 


LOUISVILLE,   ETC.,   R.   CO.   V.   LETSON.  49 

been  followed  always  most  reluctantly  and  with  dissatisfaction. 
By  no  one  was  the  correctness  of  them  more  questioned  than  by 
the  late  chief  justice  who  gave  them.  It  is  within  the  knowledge 
of  several  of  us,  that  he  repeatedly  expressed  regret  that  those 
decisions  had  been  made,  adding,  whenever  the  subject  was  men- 
tioned, that  if  the  point  of  jurisdiction  was  an  original  one,  the 
conclusion  would  be  different.  We  think  we  may  safely  assert, 
that  a  majority  of  the  members  of  this  court  have  at  all  times 
partaken  of  the  same  regret,  and  that  whenever  a  case  has  oc- 
curred on  the  circuit,  involving  the  application  of  the  case  of  the 
Bank  and  Deveaux,  it  was  yielded  to,  because  the  decision  had 
been  made,  and  not  because  it  was  thought  to  be  right.  We  have 
already  said  that  the  case  of  Bank  of  Vicksburg  and  Slocomb,  14 
Peters,  was  most  reluctantly  given,  upon  mere  authority.  We  are 
now  called  upon,  upon  the  authority  of  those  cases  alone,  to  go 
further  in  this  case  than  has  yet  been  done.  It  has  led  to  a 
review  of  the  principles  of  all  the  cases.  We  can  not  follow 
further,  and  upon  our  maturest  deliberation  we  do  not  think  that 
the  cases  relied  upon  for  a  doctrine  contrary  to  that  which  this 
court  will  announce,  are  sustained  by  a  sound  and  comprehensive 
course  of  professional  reasoning.  Fortunately  a  departure  from 
them^  involves  no  change  in  a  rule  of  property.  Our  conclusion, 
too,  if  it  shall  not  have  universal  acquiescence,  will  be  admitted 
by  all  to  be  coincident  with  the  policy  of  the  Constitution  and 
the  condition  of  our  country.  It  is  coincident  also  with  the  recent 
legislation  of  Congress,  as  that  is  shown  by  the  act  of  28th  of 
February,  1839,  in  amendment  of  the  acts  respecting  the  judicial 
system  of  the  United  States.  We  do  not  hesitate  to  say,  that  it 
was  passed  exclusively  with  an  intent  to  rid  the  courts  of  the 
decision  in  the  case  of  Strawbridge  and  Curtis,     *     *     * 

The  case  before  us  might  be  safely  put  upon  the  foregoing  rea- 
soning and  upon  the  statute,  but  hitherto  we  have  reasoned  upon 
this_  case  upon  the  supposition,  that  in  order  to  found  the  juris- 
diction in  cases  of  corporations,  it  is  necessary  there  should  be 
an  averment,  which,  if  contested,  was  to  be  supported  by  proof, 
that  some  of  the  corporators  are  citizens  of  the  state  by  which 
the  corporation  was  created,  where  it  does  its  business,  or  where 
it  may  be  sued.  But  this  has  been  done  in  deference  to  the  doc- 
trines of  former  cases,  in  this  court,  upon  which  we  have  been- 
commenting.  But  there  is  a  broader  ground  upon  which  we  desire 
to  be  understood,  upon  which  we  altogether  rest  our  present 
judgment,  although  it  might  be  maintained  upon  the  narrower 
ground  _  already  suggested.  It  is,  that  a  corporation  created  by 
and  doing  business  in  a  particular  state,  is  to  be  deemed  to  all 
intents  and  purposes  as  a  person,  although  an  artificial  person, 
an  inhabitant  of  the  same  state,  for  the  purposes  of  its  incor- 
poration, capable  of  being  treated  as  a  citizen  of  that  state,  as 
much  a.s  a  natural  person.  Like  a  citizen  it  makes  contracts,  and 
though  in  regard  to  what  it  may  do  in  some  particulars  it  differs 

-Private  Coup. 


50      CREATION,    PERSONALITY,   AND   CITIZENSHIP   OF    CORPORATIONS. 

from  a  natural  person,  and  in  this  especially,  the  manner  in  which 
it  can  sue  and  be  sued,  it  is  substantially,  within  the  meaning  of 
the  law,  a  citizen  of  the  state  which  created  it,  and  where  its 
business  is  done,  for  all  the  purposes  of  suing  and  being  sued. 
*     *     * 

Judgment  affirmed.^ 

^In  Blake  v.  McCIung  (1898),  172  U.  S.  239,  Harlan,  J.,  said  at  page 

259: 

"It  has  long  been  settled  that,  for  purposes  of  suit  by  or  against  it  in 
the  courts  of  the  United  States,  the  members  of  a  corporation  are  to 
be  conclusively  presumed  to  be  citizens  of  the  state  creating  such  cor- 
poration; and  therefore  it  has  been  said  that  a  corporation  is  to  be 
deemed,  for  such  purposes,  a  citizen  of  the  State  under  whose  laws  it 
was  organized.  But  it  is  equally  well  settled,  and  we  now  hold,  that  a 
corporation  is  not  a  citizen  within  the  meaning  of  the  constitutional 
provision  that  'the  citizens  of  each  State  shall  be  entitled  to  all  privileges 
and  immunities  of  citizens  in  the  several  States.'  " — Ed. 


CHAPTER  III. 

PROMOTERS. 

McARTHUR  v.   TIMES   PRINTING  CO. 

1892.     48  Minn.   319.   51    N.   \V.   216,   31   Am.    St.   653. 

Contracts  Made  by  Promoters — Adoption  by  the  Corporation. 

MITCHELL  J.:  The  complaint  alleges  that  about  October  i, 
1889.  the  defendant  contracted  with  plaintifif  for  his  services  as 
advertising  solicitor  for  one  year ;  that  in  April,  1890,  it  dis- 
charged him  in  violation  of  the  contract.  The  action  is  to  recover 
damages  for  the  breach  of  the  contract.  The  answer  sets  up 
two  defenses :  ( i )  That  plaintiff's  employment  was  not  for  any 
stated  time,  but  only  from  week  to  week;  (2)  that  he  was  dis- 
charged for  good  cause.  Upon  the  trial  there  was  evidence  rea- 
sonably tending  to  prove  that  in  September,  1889.  one  C.  A. 
Nimocks  and  others  were  engaged  as  promoters  in  procuring  the 
organization  of  the  defendant  company  to  publish  a  newspaper ; 
that,  about  September  12.  Nimocks,  as  such  promoter,  made  a 
contract  with  plaintiff,  in  behalf  of  the  contemplated  company, 
for  his  services  as  advertising  solicitor  for  the  period  of  one 
year  from  and  after  October  i,  the  date  at  which  it  was  expected 
that  the  company  would  be  organized ;  that  the  corporation  was 
not,  in  fact,  organized  until  October  16,  but  that  the  publication 
of  the  paper  was  commenced  by  the  promoters  October  i.  at 
which  date  plaintiff,  in  pursuance  of  his  arrangement  with 
Nimocks,  entered  upon  the  discharge  of  his  duties  as  advertising 
solicitor  for  the  paper :  that  after  the  organization  of  the  com- 
pany he  continued  in  its  employment  in  the  same  capacity  until 
discharged,  the  following  April ;  that  defendants  board  of  di- 
rectors never  took  any  formal  action  with  reference  to  the  con- 
tract made  in  its  behalf  bv  Nimocks,  but  all  of  the  stockholders, 
directors,  and  officers  of  the  corporation  knew  of  this  contract  at 
the  time  of  its  organization,  or  where  informed  of  it  soon  after- 
wards, and  none  of  them  objected  to  or  repudiated  it,  but.  on  the 
contrary,  retained  plaintiff  in  the  employment  of  the  company 
without  any  other  or  new  contract  as  to  his   services. 

There  is  a  line  of  cases  which  hold  that  where  a  contract  is 
made  in  behalf  of.  and  for  the  benefit  of,  a  projected  corporation, 
the  corporation,  after  its  organization,  cannot  become  a  party 
to  the  contract,  either  by  adoption  or  ratification  of  it.  .Abbott 
v.  Hapgood.  150  ^fass.  248,  22  N.  E.  Rep.  907;  Beach,  Corp. 
§  198.     This,  however,  seems  to  be  more  a  question  of  name  than 

51 


52 


PROMOTERS. 


of  substance;  that  is,  whether  the  liability  of  the  corporation,  in 
such  cases,  is  to  be  placed  on  the  grounds  of  its  adoption  of  the 
contract  of  its  promoters,  or  upon  some  other  ground,  such 
as  equitable  estoppel.  This  court,  in  accordance  with  what  we 
deem  sound  reason,  as  well  as  the  weight  of  authority,  has  held 
that,  while  a  corporation  is  not  bound  by  engagements  made  on 
its  behalf  by  its  promoters,  before  its  organization,  it  may  after 
its  organization  make  such  engagements  its  own  contracts.  And 
this  it  may  do  precisely  as  it  might  make  similar  original  con- 
tracts ;  formal  action  of  its  board  of  directors  being  necessary 
only  where  it  would  be  necessary  in  the  case  of  a  similar  original 
contract.  That  it  is  not  requisite  that  such  adoption  or  acceptance 
be  express,  but  it  may  be  inferred  from  acts  or  acquiescence  on 
part  of  the  corporation,  or  its  authorized  agents,  as  any  similar 
original  contract  might  be  shown.  Battelle  v.  Northwestern  Ce- 
ment and  Concrete  Pavement  Co.,  37  Minn.  89,  33  N.  W.  Rep. 
■}^2'j.  See  also  Mor.  Corp.  §  548.  The  right  of  the  corporate 
agents  to  adopt  an  agreement  originally  made  by  promoters  de- 
pends upon  the  purposes  of  the  corporation  and  the  nature  of 
the  agreement.  Of  course,  the  agreement  must  be  one  which  the 
corporation  itself  could  make,  and  one  which  the  usual  agents  of 
the  company  have  express  or  implied  authority  to  make.  That 
the  contract  in  this  case  was  of  that  kind  is  very  clear;  and  the 
acts  and  acquiescence  of  the  corporate  officers,  after  the  organi- 
zation of  the  company,  fully  justified  the  jury  in  finding  that  it 
had  adopted  it  as  its  own. 

The  defendant,  however,  claims  that  the  contract  was  void 
under  the  statute  of  frauds,  because,  "by  its  terms  not  to  be  per- 
formed within  one  year  from  the  making  thereof,"  which  counsel 
assumes  to  be  September  12,  the  date  of  the  agreement  between 
plaintiff  and  the  promoter.  This  proceeds  upon  the  erroneous 
theory  that  the  act  of  the  corporation,  in  such  cases,  is  a  ratifica- 
tion, which  relates  back  to  the  date  of  the  contract  with  the  pro- 
moter, under  the  familiar  maxim  that  "a  subsequent  ratification 
has  a  retroactive  effect,  and  is  equivalent  to  a  prior  command." 
But  the  liability  of  the  corporation,  under  such  circumstances, 
does  not  rest  upon  any  principle  of  the  law  of  agency,  but  upon 
the  immediate  and  voluntary  act  of  the  company.  Although  the 
acts  of  a  corporation  with  reference  to  the  contracts  made  by 
promoters  in  its  behalf  before  its  organization  are  frequently 
loosely  termed  "ratification,"  yet  "a  ratification"  properly  so 
called,  implies  an  existing  person,  on  whose  behalf  the  contract 
might  have  been  made  at  the  time.  There  cannot,  in  law,  be  a 
ratification  of  a  contract  which  could  not  have  been  made  bind- 
ing on  the  ratifier  at  the  time  it  was  made,  because  the  ratifier 
was  not  then  in  existence.  In  re  Empress  Engineering  Co.,  16 
Ch.  Div,  128;  Melhado  v.  Porto  Alegre,  N.  H.  &  B.  Railway  Co., 
L.  R.,  9  C.  P.  505 ;  Kellner  v.  Baxter,  L.  R.,  2  C.  P.  185.  What 
is  called  "adoption,"  in  such  cases,  is,  in  legal  effect,  the  making 


PITTSBURGH   MINING   CO,    V.    SPOONER.  53 

of  a  contract  of  the  date  of  the  adoption,  and  not  as  of  some 
former  date.  The  contract  in  this  case  was,  therefore,  not  within 
the  statute  of  frauds.  The  trial  court  fairly  submitted  to  the 
jury  all  the  issues  of  fact  in  this  case,  accompanied  by  instruc- 
tions as  to  the  law  which  were  exactly  in  the  line  of  the  views 
we  have  expressed;  and  the  evidence  justified  the  verdict. 

The  point  is  made  that  the  plaintiff  should  have  alleged  that 
the  contract  was  made  with  Ximocks,  and  subsequently  adopted 
by  the  defendant.  If  we  are  correct  in  what  we  have  said  as  to 
the  legal  effect  of  the  adoption  by  the  corporation  of  a  contract 
made  by  a  promoter  in  its  behalf  before  its  organization,  the 
plaintiff  properly  pleaded  the  contract  as  having  been  made  with 
the  defendant.  But  we  do  not  find  that  the  evidence  was  ob- 
jected to  on  the  ground  of  a  variance  between  it  and  the  com- 
plaint. The  assignments  of  error  are  very  numerous,  but  what 
has  been  already  said  covers  all  that  are  entitled  to  any  special 
notice.     Order  affirmed. 


/  PITTSBURGH  MINING  CO.  v.  SPOONER. 
1889.     74  Wis.  307,  42  N.  \V.  259.  17  Am.  St.  149. 
Fiduciary  Relation. 

This  action  was  brouglit  by  the  Pittsburgh  Mining  Company 
for  the  purpose  of  recovering  $70,000  of  money  had  and  received 
by  the  defendants  for  the  use  of  the  company.  The  materia) 
allegations  in  the  complaint  are: 

(i)  That  in  February,  1887,  the  defendants  conceived  the  idea 
and  agreed  together  to  promote  the  organization  of  the  plaintiff 
corporation  for  the  ostensible  purpose  of  carrying  on  the  busi- 
ness of  mining  iron  on  the  Gogebic  range,  so  called,  in  the  state 
of  Michigan,  but  for  the  real  purpose  of  cheating  those  who 
might  deal  with  said  corporation,  and  by  so  doing  enrich  them- 
selves. 

(2)  That  in  pursuance  of  such  scheme  the  defendants  obtained 
for  the  purpose  of  purchase  or  temporary  control  a  mining  option 
on  said  range,  conferring  the  right  to  prospect,  explore,  and  mine 
for_  iron  on  a  tract  of  land  described  in  the  complaint.  This 
option  was  owned  by  certain  parties  named  in  the  complaint,  and 
the  price  demanded  by  them  for  it  was  $20,000,  and  no  more. 

(3)  That,  having  obtained  the  control  of  such  option  for  the 
purposes  of  the  corporation,  the  defendants  proceeded  to  obtain 
subscriptions  to  the  capital  stock  of  the  proposed  corporation, 
to  raise  the  money  to  buy  it;  that  to  induce  subscriptions  to  said 
capital  stock  the  defendants  falsely  and  fraudulently  represented 
to  divers  persons,  and  to  all  persons  who  became  and  now  are 
stockholders  in  said  corporation,  that  the  price  demanded  by  the 


54 


PROMOTERS. 


owners  of  said  option  was  $90,000,  and  that  it  could  not  be 
bought  for  less;  that  the  defendants  were  themselves  desirous  of 
buying  it,  but  were  unable  pecuniarily  to  pay  so  much  money, 
but  desired  to  organize  a  corporation  to  purchase  it;  that  they 
would  themselves  become  stockholders  in  the  corporation  to  the 
extent  of  their  ability  to  pay  for  the  same;  that  there  was  no 
speculation  in  the  purchase  price;  that  the  defendants  were  mak- 
ing nothing  out  of  it — not  even  their  expenses,  unless  the  corpo- 
ration saw  fit  to  reimburse  them — except  what  all  stockholders 
would  make  alike  through  the  operation  of  the  proposed  cor- 
poration in  mining  the  ores  covered  by  said  option. 

(4)  The  defendants  also  represented  that  for  the  purpose  of 
the  successful  operation  of  the  business  of  mining  on  said  tract 
of  land  it  would  be  necessary  for  the  corporation  to  raise  the  sum 
of  $100,000  in  money — $90,000  for  the  purpose  of  purchasing 
the  option  from  the  owners  thereof,  and  $10,000  to  be  put  in  the 
treasury  of  the  company  for  the  purpose  of  developing  the  mines. 

(5)  In  furtherance  of  said  fraudulent  scheme  the  defendants 
drew  up,  and  by  said  fraudulent  representations  procured  to  be 
signed,  a  subscription  paper,  of  which  the  following  is  a  copy : 
"The  undersigned  hereby  agree  with  A.  H.  Alain,  of  the  city  of 
Madison,  Dane  county,  Wisconsin,  the  owner  of  a  mining  option 
upon,  in,  and  to  all  of  the  north  half  of  the  southwest  quarter  of 
section  number  11,  town  47,  range  45,  east  of  the  Michigan 
meridian,  situate,  lying,  and  being  in  the  county  of  Ontonagon, 
state  of  Michigan,  and  with  each  other,  that  they  will  take  of  and 
from  the  said  A.  H.  Main  the  number  of  shares  of  non-assessable 
paid  up  stock  in  the  Pittsburgh  Mining  Company,  proposed  to 
be  formed,  set  opposite  their  respective  names,  and  pay  for  the 
same  the  sum  of  $2.50  per  share ;  said  payment  to  be  made  as 
soon  as  the  company  is  duly  incorporated,  under  and  by  virtue 
of  either  the  laws  of  the  state  of  Michigan  or  Wisconsin;  and 
the  said  A.  H.  Main  shall  assign  and  transfer  over  to  said  cor- 
poration, and  give  and  convey  to  said  corporation,  a  perfect  title 
to  the  same  said  option.  It  is  understood  that  the  capital  stock 
of  said  corporation  shall  be  $1,000,000,  in  40,000  shares,  of 
$25.00  each.  It  is  also  understood  and  agreed  that  a  shaft  has 
been  sunk  upon  the  land  covered  by  said  option,  to  a  depth  of 
about  seventy  feet,  and  that  there  is  in  sight,  at  such  depth  below 
the  surface  of  the  land  so  covered  by  said  option,  ten  thousand 
tons    of   iron   ore." 

(6)  The  complaint  then  alleges  that  this  subscription  paper 
was  signed  by  a  large  number  of  persons,  agreeing  to  take  shares 
in  a  sufficient  amount  in  the  whole  to  cover  the  entire  proposed 
stock  of  the  projected  corporation,  to-wit,  $r,ooo,ooo. 

(7)  Immediately  after  said  stock  had  been  all  subscribed,  and 
on  the  2ist  day  of  ATarch,  1887,  the  defendants  organized  a  cor- 
poration in  conformity  to  the  laws  of  this  state,  under  the  name 
of  the  "Pittsburgh   IMining  Company,"   now  the   plaintiff  in  this 


PlTTSliURGH    MINING   CO.   V.    SPOONER.  55 

action.  The  defendants  were  the  only  original  incorporators; 
and  on  the  22d  day  of  March,  1887,  the  first  meeting  of  said 
corporation  was  held  at  Madison,  in  this  state.  All  the  defend- 
ants were  present  at  such  meeting.  The  defendant  Spooner  was 
elected  president,  and  the  defendant  Main  treasurer.  That  about 
the  time  of  said  meeting,  and  in  furtherance  of  said  fraudulent 
scheme,  the  defendant  Main,  with  the  advice  and  procurement  of 
the  other  defendants,  Spooner  and  Oakley,  but  in  the  joint  in- 
terest of  all  of  them,  subscribed  for  the  entire  stock  of  said 
corporation,  viz.,  $1,000,000,  except  one  share  each  of  $25,  which 
were  taken  by  the  defendants  Spooner  and  Oakley ;  and  there- 
upon at  the  same  meeting,  by  the  unanimous  vote  of  the  defend- 
ants as  sole  corporators  and  directors,  the  following  resolution 
was  adopted,  viz. :  '' Resolved,  that  in  accordance  with  the  sub- 
scription of  A.  H.  Main  to  the  capital  stock  of  said  company,  the 
president  and  secretary  hereof  issue  to  him,  or  to  such  person 
or  persons  as  he  may  direct,  and  in  such  number  of  shares  as 
he  may  direct,  all  of  the  said  stock,  except  two  shares  thereof, 
one  of  which  is  held  by  said  Phillip  L.  Spooner,  Jr.,  and  the  other 
by  said  F.  W.  Oakley ;  the  said  stock  to  the  said  Main  to  be 
issued  as  paid  up  in  full,  in  consideration  of  his  making  and 
delivering  to  the  president  of  the  said  corporation,  for  the  said 
corporation,  an  assignment  in  writing,  duly  executed,  of  an  option 
which  he  now  owns  on  the  north  half  of  the  southwest  quarter 
of  section  eleven  (11),  township  forty-seven  (47),  range  forty- 
five    (45)    west,   Ontonagon  county,   Michigan." 

(8)  It  is  further  alleged  in  the  complaint  that  none  of  the 
stock  subscribed  for  by  said  Main  was  ever  issued  to  him,  except 
the  sum  of  $25,000  now  held  by  defendant  Main.  That  although 
he  conveyed  to  the  corporation  the  mining  option  before  men- 
tioned in  nominal  payment  for  all  of  the  stock  of  said  corpora- 
tion, neither  the  defendant  Main  nor  any  of  the  defendants  ever 
had  or  held  any  valuable  interest  in  said  option  above  the  price 
of  $20,000.  which  had  to  be  paid  to  the  owners  thereof.  That, 
said  option  having  been  procured  and  being  held  by  the  defend- 
ants, or  by  the  defendant  Main  for  them,  as  promoters  and 
trustees  of  said  corporation,  whatever  value  or  interest  they 
possessed  or  could  possess  therein  inured  to  and  was  the  prop- 
erty of  said  corporation,  when  formed,  without  advance  in  price 
or  other  conditions ;  and  it  is  further  alleged  that  $20,000  was 
the  full  value  of  said  option. 

(9)  The  complaint  further  alleges  that  the  defendants,  in 
furtherance  of  their  fraudulent  scheme,  after  said  subscriptions 
were  obtained,  caused  said  option  to  be  conveyed  to  said  Main 
without  any  consideration ;  then  caused  the  corporation  to  buy 
it  from  him  for  substantially  its  entire  capital  stock,  caused  the 
agreement  to  take  shares  in  the  projected  company,  as  hereinbe- 
fore set  forth,  to  read  as  an  agreement  to  take  them  of  said  Main 
and  pay  him   for  them,  instead  of  the  company,  and  then  issue 


56 


PROMOTERS. 


the  shares  so  subscribed  for  to  the  several  persons  who,  by  the 
agreement  aforesaid,  had  agreed  to  take  them;  and  collected 
from  them  the  sum  of  $100,000,  paid  the  owners  of  the  option 
$20,000  for  the  same,  kept  $10,000  in  the  treasury  of  the  com- 
pany, and  fraudulently  converted  the  remaining  $70,000  to  their 
own  use,  in  violation  of  their  duty  to  the  company,  as  its  pro- 
moters, trustees,  and  directors;  whereby  the  plaintiff  has  sus- 
tained a  loss  of  $70,000. 

(10)  The  complaint  further  alleges  that  in  procuring  control 
of  the  said  mining  option,  in  organizing  the  corporation,  secur- 
ing subscriptions  to  the  capital  stock,  collecting  moneys  thereon, 
paying  for  said  option  to  the  owners  thereof,  having  it  conveyed 
to  the  defendant  Main,  and  by  him  to  the  plaintiff  corporation, 
and  in  all  other  matters  touching  the  organization  of  the  plain- 
tiff corporation,  and  the  purchase  of  said  option,  the  defendants 
became  and  were  the  promoters,  agents  and  trustees  of  the 
plaintiff,  and,  while  so  acting,  they  could  not,  in  law,  by  any 
pretext,  pretense,  or  contrivance  gain  any  personal  profit  or 
advantage  over  the  plaintiff,  or  make  any  valid  contract  with  it 
to  its  prejudice,  and  to  further  their  individual  advantage. 

(11)  It  is  further  alleged  in  the  complaint  that  the  amount 
paid  to  the  owners  of  said  option  by  the  defendants  in  behalf  of 
the  plaintiff  was  the  sum  of  $20,000;  that  the  amount  obtained 
by  the  defendants  from  the  corporation  on  the  fraudulent  pre- 
text that  such  payment  was  $90,000,  $70,000  of  which  the  de- 
fendants have  diverted  from  the  company,  and  fraudulently 
appropriated  to  their  own  use,  and  for  this  amount  they  are 
jointly  indebted  to  the  plaintiff  as  for  so  much  money  had  and 
received  to  its  use,  and  the  plaintiff  demands  judgment  for  the 
said  sum  of  $70,000,  with  interest  and  costs. 

To  this  complaint  the  defendants  demurred,  and  allege  as 
grounds  of  demurrer:  (i)  That  the  plaintiff  has  not  legal  capac- 
ity to  sue;  (2)  that  the  complaint  does  not  state  facts  sufficient 
to  constitute  a  cause  of  action.  Upon  the  argument  of  the 
demurrer  in  the  circuit  court,  the  court  sustained  the  demurrer, 
and  from  the  order  sustaining  the  demurrer,  the  plaintiff  appealed 
to  this  court. 

TAYLOR,  J. :  Upon  the  hearing  of  the  appeal  in  this  court, 
no  contention  was  made  by  the  learned  counsel  for  the  respond- 
ents that  the  demurrer  was  properly  sustained  upon  the  first  al- 
leged ground,  viz.,  that  "the  plaintiff  has  not  legal  capacity  to 
sue."  The  only  question  argued  at  length  was  whether  the  com- 
plaint stated  facts  sufTficient  to  constitute  a  cause  of  action.  The 
learned  counsel  for  the  appellant  corporation  contends  that  the 
complaint  states  facts  constituting  a  cause  of  action — First,  upon 
the  ground  of  actual  fraud  committed  by  the  defendants  upon 
the  company  by  the  sale  of  the  mining  option  to  the  company  for 
a  sum  greatly  in  excess  of  its  real  value,  brought  about  by  false 


PITTSBURGH   MINING  CO.  V.  SPOONER.  57 

representations  as  to  its  actual  cost;  and,  second,  that  it  states  a 
cause  of  action  against  the  defendants  as  the  promoters  of  the 
corporation,  and,  as  such,  holding  a  relation  of  trust  and  confi- 
dence towards  it ;  and  that,  acting  as  the  agents  and  officers  of 
the  corporation,  they  sold  to  the  corporation,  and  bought  for 
the  corporation,  the  mining  option  for  the  sum  of  $70,000  more 
than  its  actual  value  and  more  than  they  paid  for  the  same ;  that 
this  was  done  without  the  knowledge  and  consent  of  the  real 
stockholders  of  the  corporation,  and  in  fraud  of  their  rights,  and 
upon  that  ground  they  are  liable  to  the  corporation  for  the  profits 
made  by  them  on  such  sale  to  the  corporation.  The  last  alleged 
cause  of  action  is  the  one  upon  which  the  learned  counsel  for  the 
appellant  mainly  relies  in  this  court,  and  is  the  one  in  favor  of 
which  the  main  argument  of  the  learned  counsel  for  the  appel- 
lant is  made. 

Considering  the  defendants  as  the  officers  and  promoters  of 
the  corporation  at  the  time  of  the  alleged  purchase  and  sale  com- 
plained of,  it  seems  to  me  very  clear  that — laying  out  of  view  the 
fact  that  the  money  of  the  stockholders  paid  for  their  stock  to 
the  corporation,  and  which  money  was  paid  to  defendants  for  the 
mining  option,  was  obtained  by  the  issuing  of  full-paid  shares  to 
the  stockholders  upon  the  payment  of  10  per  cent,  of  their  par 
value,  in  violation  of  the  statute — there  can  hardly  be  room  for  a 
contention  that,  upon  the  facts  stated  in  the  complaint,  a  cause 
of  action  is  not  stated  against  the  defendants.  Under  the  allega- 
tions of  the  complaint  we  must  treat  the  alleged  sale  of  the  min- 
ing option  to  the  defendant  Main  for  the  entire  stock  of  the  cor- 
poration, viz.,  $1,000,000,  as  a  mere  subterfuge  and  device  to 
cover  up  the  real  transaction,  which  is  substantially  as  follows : 
The  defendants  having  obtained  a  right  to  purchase  the  mining 
option  mentioned  in  the  complaint  for  $20,000,  proceeded  to  form 
a  corporation  to  make  such  purchase,  representing  to  the  persons 
who  subscribed  for  the  stock  that  it  would  cost  $90,000  to  make 
such  purchase,  and,  having  first  induced  other  persons  to  sub- 
scribe for  the  stock  upon  such  representations,  and  to  pay  to  the 
corporation  upon  or  for  their  stock  $100,000,  the  corporation 
then,  through  its  officers,  the  defendants  themselves,  purchased 
the  option  for  $90,000,  paying  the  $20,000  which  it  cost  them 
with  the  money  received  by  the  corporation,  and  converting  the 
$70,000  to  their  own  use.  This  is  the  substance  of  w^hat  is 
alleged  to  have  been  done  by  the  company,  and  it  appears  to  me 
to  be  immaterial  as  to  the  manner  of  doing  it.  It  being  shown 
that  the  defendants  formed  the  company  for  the  purpose  of 
purchasing  this  option,  and  having  induced  the  present  stock- 
holders to  furnish  $90,000  of  their  money  to  make  the  purchase 
under  the  false  impression  created  by  the  defendants  that  the 
defendants  would  be  compelled  to  pay  that  amount  for  the  purchase 
price,  and  the  defendants  having  afterwards,  as  officers  and 
agents  of  the  company,  purchased  for  the  company  such  option. 


^8  PROMOTERS. 

and  paid  themselves  $70,000  more  than  they  knew  they  could 
purchase  it  for,  and  $70,000  more  than  they  in  fact  paid  for  the 
same,  it  seems  to  me  there  can  be  no  doubt  of  their  habiUty  to 
refund  to  the  corporation  the  $70,000  so  obtained.  In  making 
this  statement  we  are  not  to  be  understood  as  making  any  charge 
of  fraud  or  unfair  deahng  on  the  part  of  the  very  respectable 
citizens  who  are  the  defendants  in  this  action;  all  that  is  in- 
tended is  that,  admitting  that  the  allegations  of  the  complaint  in 
this  action  are  true,  then  the  result  indicated  follows.  The  truth 
or  falsity  of  these  statements  is  not  now  under  consideration. 
For  the  purposes  of  this  case,  the  defendants  do  not  controvert 
them. 

That  the  defendants   were  promoters  of  the  corporation,  and 
as  such,  and  as  the  officers  of  the  same,  they  assumed  the  posi- 
tion of  agents  and  trustees  of  the  corporation  in  the  transaction 
of  its  business,  admitting  the  facts  to  be  as  stated  in  the  com- 
plaint to  be  true,  there  can  be  no  doubt.     This  is  well  established 
by  the  following  cases  cited  by  the  learned  counsel  for  the  appel- 
lant, viz.:  Society  v.  Abbott,  2  Beav.  559;  New  Sombrero  Phos- 
phate  Co.   V.   Erlanger,   L.   R.,   5    Ch.    Div.    73;   and    Phosphate 
Sewage  Co.  v.  Hartmont,  Id.  394;  i  Mor.  Priv.  Corp.  §  291;  In 
re  Paper  Box  Co.,  L.  R.,  17  Ch.  Div.  471.     See,  also,  the  case  of 
Railroad  Co.  v.  Tiernan,  cited  by  the  learned  counsel  for  the  re- 
spondents,  37   Kan.  606.     Assuming  that  these  defendants  were 
the   promoters   of   this   corporation,   and    it   being   alleged   in   the 
complaint  that  two  of  them  were  the  officers  of  the  corporation 
when  the  sale  and  purchase  were  made,  they  must  be  treated  as 
the  agents  and  trustees  of  the  corporation,  and  as  such  their  duties 
and  obligations  towards  it  are  clearly  defined  by  the  authorities 
above  cited.     The  learned  judge,  in  deciding  the  case  of  Railroad 
Co.  V.  Tiernan,  cites  the  rule  of  law  governing  their  action,  as 
laid  down  by  the  supreme  court  of  Massachusetts  in  the  cases  of 
Parker  v.  Nickerson,  137  Mass.  487,  and  Parker  v.  Nickerson,  112 
]\Iass.  195.     In  these  cases  the  rule  is  stated  as  follows :     "A  trus- 
tee or  agent  cannot  purchase  on  his  own  account  what  he  sells  on 
account  of  another,  nor  purchase  on  account  of  another  what  he 
sells  on  his  own  account;     *     *     *     and,  if  he  does  so,  the  cestui 
que  trust  or  principal,  unless  upon  the   fullest  knowledge  of  all 
the  facts  he  elects  to  confirm  the  act  of  the  trustees  or  agent,  may 
repudiate  it,  or  he  may  charge  the  profits  made  by  the  trustee  or 
agent  with  an  implied  trust  for  his  benefit."     See  Tyrrell  v.  Bank, 
10  H.  L.  Cas.  26;  Kimber  v.  Barber,  L.  R.,  8  Ch.  56;  Simons  v. 
Vulcan  etc.  Mining  Co.,  61  Pa.  St.  202.     This  rule  has  been  sanc- 
tioned and  affirmed  by  this  court.     See  Puzey  v.  Senier.  9  Wis. 
370;  Pickett  V.  School-Dist.,  25  Wis.  551;  Cook  v.  Mill  Co.,  43 
Wis.  433;  In  re  Orphan  Asylum,  36  Wis.  534.     Construed  as  I 
think  the  allegations  in  this  case  ought  to  be  construed  upon  a 
demurrer,   they  present   the   case   of   trustees   and   agents   of   the 
corporation  selling  property  to  the  corporation  on  the  one  hand, 


PITTSBURGH    MINING   CO.   V.    SPOONER.  59 

and  on  the  other  hand  buying  for  the  corporation,  and  making 
a  profit  for  themselves  by  the  transaction  of  $70,000.  Under 
the  rule  of  law  above  stated  the  corporation  may  charge  such 
profits  made  by  the  trustees  and  agents  with  an  implied  trust  for 
the  benefit  of  the  corporation,  and  may  recover  such  money  in 
an  action  brought  by  the  corporation. 

It  is  urged  against  this  claim  that  at  the  time  of  the  sale  and 
])urchase    there    were    no    persons    interested    in    the    corporation 
except  the   said   agents  and   trustees   themselves,   and   so  no   one 
was  injured,  as  all  parties  then  interested  were  fully  aware  of  all 
the   facts.     We  do  not  think  this  a  true  statement  of  the  case. 
According   to   the   allegations    of    the   complaint,    all   the   present 
owners  of  the  stock  were  interested  parties.     They  were  in   fact 
the  corporation,  and  the  defendants   represented   them  in  making 
the   sale,   and   not   merely   themselves.     The   relations   which   the 
defendants  bore  to  the  corporation  in  this  case,  according  to  the 
facts  alleged  in  the  complaint,  are  well  stated  by   Chief  Justice 
Thompson   in   the   case   of    Simons    v.    Vulcan    etc.    Mining    Co., 
supra.     After  stating  that  it  was  claimed  that  the  organized  board 
of  directors  was  the  company,  and  whatever  it  did  could  not  be 
inquired  into  by  the  corporation  put  in  motion  by  the  instance  of 
the  stockholders,  he  says :     "This  is  an  error,  and   results   from 
overlooking  the  fact  that  directors  are  but  the  agents  and  trustees 
of  the  company ;  that  they  have  power  to  act  only  for  the  interest 
of  the  company,  and  not  against  it.     The  shareholders  constitute 
the  company,  where  there  is  stock,  and  not  the  directors.     It  was 
therefore  well  put  in  the  charge  of  the  learned  judge   that  the 
directors    had    no   power    to    bind    the    stockholders    by    allowing 
profits  to  the   defendants,   after  holding  out   in   their   prospectus 
that  the  property   was   obtained   at  original   prices,   and   that   the 
defendants   could   not  claim  any  if  they   hold   out   that  they   had 
purchased  the  property  for  the  company,  and  were  conveying  at 
original  prices.     A  fraud  perpetrated  against  the  corporation  by 
any  or  all  of  the  directors  may  assuredly  be  redressed  by  such 
an  action  in  the  name  of  the  corporation.     As  already  said,  they 
are  its  agents  and  trustees,  which  implies  accountability  to  their 
principal."     In   the   case   In   re   Paper   Box   Co.,   L.    R..    \y   Ch. 
Div.  471,  the  Master  of  the  Rolls  says:     "I  quite  agree  to  this: 
that,    if    promoters    make    an    arrangement    to    get    a    profit    for 
themselves  out  of  what  is  apparently  paid  to  the  vendors,  it  is 
immaterial  whether  the  contract  with  the  vendors  is  approved  of 
by   the   directors   of   the   company,   who   are   the   promoters,    just 
before  the  allotment  or  just  after.     In  both  cases  it  is  intended 
to  cheat  the  future  shareholders,  and  of  course  it  makes  no  dif- 
ference whatever  that  the  persons  who  at  the  time  the  allotment 
was   made   were   in    fact  the  promoters   or   their   nominees,    knew 
of  the   fraud."     It   seems  to  me,  unless   we  are  prepared   to  go 
contrary  to  the  cases  above  cited,  and  to  very  many  others  cited 
in  the  brief  of  the  appellant,  we  must  hold  that  an  action  can  be 


6o  PROMOTERS. 

maintained  in  the  name  of  the  corporation  to  redress  the  wrong 
alleged  to  have  been  done  by  the  defendants. 

What  would  have  been  the  relations  of  the  defendants  to  the 
corporation  if  they  had  in  fact  owned  the  mining  option,  and  had 
formed  the  corporation  and  issued   full-paid  stock  to  themselves 
for  such  option,  and  transferred  such  stock  to  themselves  in  pay- 
ment for  such  mining  option,  and  then,  by  exaggerated  or  false 
statements  as  to  the  value   for  such  mining  option,  or  as  to  its 
actual  cost,  had  induced  others  to  purchase  from  them  such  stock, 
need  not  be  determined  in  this  action;  nor  whether  in  such  case 
any  action  for  such  fraud  could  be  maintained  by  the  corporation. 
Under  the  allegations  of  the  complaint,  such  was  not  the  trans- 
action in  this  case.     In  this  case  no  sale  to  or  purchase  by  the 
corporation  was  made  until  all  the  stock,  or  nearly  all,  had  been 
agreed   to  be   taken   by   other   parties   than   the   defendants,   and, 
although   the    written   agreement   which    they    signed    stated    that 
they  were  to  buy  the  stock  of  defendants,  the  allegations  of  the 
complaint  show  that  at  the  time  such  contract  was  signed  by  the 
present  stockholders  the  defendants  did  not  have  or  own  any  of 
the  stock  of  the  corporation,  nor  did  they  own  the  mining  option. 
The  allegations  also  show  that  no  stock  was  ever  issued  to  the 
defendants  except  to  the  amount  of  $25,000,  and  the  balance  of 
the   stock  was  issued  by  the  corporation  directly  to  the  present 
holders;   and   the   mining   option   was   bought   by   the   defendants 
and   sold  to  the   company  after  such   stock  had  been   subscribed 
and  paid  for  by  the  present  stockholders,  with  the  money  paid  by 
the  stockholders  to  the  corporation.     \Miat  is  said  by  the  learned 
author   (i   Mor.  Priv.  Corp.  §292,  p.  279)    in  commenting  upon 
the  case  of  the  Sombrero  Phosphate  Co.,  L.  R.,  5  Ch.  Div.  73, 
is  peculiarly  applicable  to  the  case  at  bar.     In  discussing  the  ques- 
tion whether  the  action  would  lie  in  favor  of  the  corporation  he 
says:     "Before  any  shares  had  been  issued  the  existence  of  the 
company  was  a  fiction.     The  shareholders  really  formed  the  com- 
pany,   each   one   becoming   a   member   when   he   took   his    shares. 
While  the  contract  for  the  purchase  of  the  property  was  nomi- 
nally in  force  from  the  time  of  its  approval  by  the  board  of  di- 
rectors, yet  it  really  took  effect  only  after  the  shareholders  had 
taken  their  shares.     It  then  became  binding  upon  all  the  share- 
holders  collectively,   or,   in   other   words,   on   the   company.     The 
fraud  really  consisted  in  inducing  the  shareholders  to  enter  into 
this  contract  in  their  collective  capacity,  and  in  using  the   funds 
belonging  to  the  shareholders  collectively  in  paying  the  purchase 
price.     It  is  evident,  therefore,  that  the  injury  tp  the  shareholders 
was  an  injury  to  their  collective  or  corporate  interests,  and  that 
the  company  was  the  proper  complainant."     These   remarks   are 
strictly  applicable  to  the  transaction  in  this  case.     It  is  true  that 
it  is  alleged  that  the  defendants  formed  a  corporation  under  the 
statutes  of  this  state,  and  that  such  corporation  passed  a  resolu- 
tion  to  permit   the   defendant   Main   to   subscribe    for   the  whole 


PITTSBURGH   MINING  CO.  V.   SPOONER.  6l 

capital  stock,  and  pay  for  it  by  a  transfer  of  the  mining  option 
to  the  corporation;  but  it  appears  from  the  complaint  that  before 
this  was  done  an  agreement  had  been  made  between  the  defend- 
ants and  the  corporation  that  other  persons  should  become  the 
owners  of  the  stock  of  the  corporation,  and  pay  a  certain  sum  of 
money  for  such  stock,  and  thereby  become  the  real  parties  con- 
stituting the  corporation,  and  that  their  money  should  pay  for  the 
mining  option;  and  it  further  appears  that  the  transfer  was  not 
made  to  the  corporation  until  after  the  real  stockholders  had  be- 
come such  by  paying  their  money  for  the  stock.  The  fraud  in 
the  sale  was  therefore  a  fraud  upon  the  collective  interests  of 
the  shareholders,  as  it  was  in  the  Sombrero  Phosphate  Co.  case. 

Taking  all  the  allegations  of  the  complaint  together,  they  charge 
the  defendants  with  purchasing  the  mining  option  for  the  sum  of 
$20,000  from  themselves  for  the  benefit  of  the  corporation,  the 
corporation  at  the  time  of  the  sale  and  purchase  representing  the 
present  holders  of  its  stock,  and  not  simply  the  interest  of  them- 
selves. That  this  complaint  states  a  good  cause  of  action  in  favor 
of  the  corporation  against  the  defendants,  we  think,  is  well  set- 
tled upon  principles  and  authority.  The  cases  above  cited  of  New 
Sombrero  Phosphate  Co.  v.  Erlanger,  L.  R.,  5  Ch.  Div.  73, 
Phosphate  Sewage  Co.  v.  Hartmont,  L.  R.,  5  Ch.  Div.  394,  and 
Simons  v.  Vulcan  etc.  Mining  Co.,  61  Pa.  St.  202,  as  well  as 
many  of  the  other  cases  cited  in  the  brief  of  the  counsel  for  the 
appellant,   very  clearly   sustain   this   action. 

It  is,  however,  urged  in  a  very  able  argument  by  the  counsel 
for  the  defendants  that,  admitting  the  corporation  would  have  a 
cause  of  action  against  the  defendants  for  the  profits  made  by 
them  on  the  sale  of  the  mining  option  to  the  corporation,  had  the 
corporation  obtained  the  money  with  which  it  paid  the  defendants 
for  such  option  in  a  lawful  way,  still,  as  the  allegations  of  the 
complaint  show  that  it  obtained  such  money  by  an  illegal  issue  or 
sale  of  its  stock  to  its  corporators,  no  action  will  He  to  recover 
of  the  defendants  any  part  of  the  money  so  illegally  obtained  by 
the  corporadon.  Under  my  construction' of  the  allegations  of  the 
complaint,  it  is  very  clear  that  the  fact  that  the  corporation  re- 
ceived the  money  which  paid  the  defendants  for  their  mining 
option  upon  an  illegal  issue  of  its  stock  cannot  be  a  defense  to 
this  action  to  compel  them  to  refund  to  the  company  so  much  of 
the  purchase  price  as  was  unlawfully  received  by  them  on  such 
sale.  The  basis  of  the  argument  of  the  learned  counsel  is  that 
these  defendants  received  the  money  of  the  stockholders  upon  this 
alleged  illegal  sale  of  the  stock  as 'the  agents  of  the  corporation, 
and  that  as  such  agents  they  cannot  be  made  to  account  to  their 
principal  for  the  money  so  received  by  them  upon  such  illegal 
sales.  Admitting  this  to  be  a  true  statement  of  the  facts  alleged 
in  the  complaint.  I  think,  under  the  decisions  of  this  and  many 
other  courts,  these  agents  cannot  set  up  the  illegality  of  the  trans- 
actions as  a  defense  to  an  action  by  the  principal  to  recover  the 


62  PROMOTERS. 

money  of  its  agents.  I  think,  however,  that  the  allegations  of 
the  complaint  show  that  the  money  received  on  the  sale  of  the 
stock  was  in  the  possession  of  the  corporation,  and  not  merely 
in  the  possession  of  its  agents,  and,  being  so  in  the  possession  of 
the  corporation,  the  defendants  and  agents  of  the  corporation  paid 
it  over  to  themselves  as  the  consideration  for  their  mining  option. 
Under  the  allegations  of  the  complaint,  they  are  not  refusing  to 
account  for  money  collected  by  them  as  agents  of  the  corporation 
in  making  sales  of  its  stock,  but  they  are  refusing  to  account  for 
money  wrongfully  obtained  from  the  corporation  upon  a  sale  of 
their  mining  option  to  the  company.  Having  changed  their  posi- 
tion in  regard  to  this  money  by  receiving  it  from  the  corporation 
as  payment  for  the  mining  option  sold  to  the  company,  they 
cannot  now  claim  to  hold  it  as  money  received  by  them  as  the 
agents  of  the  corporation  in  making  illegal  sales  of  the  stock  of 
the  corporation.  The  money  paid  to  the  corporation  on  such  an 
illegal  issue  or  sale  of  stock  was,  notw^ithstanding  such  illegal  sale, 
the  money  of  the  corporation,  as  against  all  the  world.  The  pur- 
chasers of  such  illegally  issued  stock  could  not  recover  back  the 
money  paid  by  them  to  the  corporation  upon  such  illegal  transac- 
tion (see  Clark  v.  Lincoln  Lumber  Co.,  59  Wis.  655,  661,  665. 
18  N.  W.  Rep.  492)  ;  and,  if  they  cannot  recover  it  back  from 
the  corporation,  no  one  else  can.  The  corporation,  having  the 
possession  of  the  money,  is  for  all  practical  purposes  the  owner 
of  it ;  and,  if  these  defendants  took  the  money  from  the  cor- 
poration in  an  illegal  and  fraudulent  way.  it  is  no  defense  to  such 
illegal  act  that  the  corporation  obtained  the  money  by  a  violation 
of  the  statute  in  selling  its  stock.  If  A.  obtains  the  title  and 
possession  of  property  from  B.  by  some  fraudulent  device,  and 
C.  obtains  the  same  property  of  A.  by  fraud,  and  A.  brings  an 
action  against  C.  to  recover  the  property  back,  or  for  damages 
for  the  fraud  it  would  be  no  defense  for  C.  that  A.  had  fraud- 
ulently obtained  it  from  B.  This  would  certainly  be  so,  unless  B. 
made  a  claim  for  the  property  against  C.  In  this  case  the  persons 
whose  money  came  to  the  possession  of  the  corporation  cannot 
enforce  any  claim  to  it  as  against  the  corporation,  and  conse- 
quently they  could  not  enforce  a  claim  to  it  as  against  the  persons 
to  whom  the  corporation  transferred  it.  and,  if  the  present  stock- 
holders w-ere  instrumental  in  bringing  this  action  in  the  name  of 
the  corporation,  as  they  must  be  held  to  be.  by  bringing  it  in  the 
name  of  the  corporation,  they  affirm  the  right  of  the  corporation 
to  the  money  so  received  by  it.  By  what  rule  of  law  have  the 
defendants  the  right  to  challenge  the  title  of  the  corporation  to 
the  money  which  was  paid  to  them  upon  the  sale  of  their  min- 
ing option  to  the  corporation?  I  am  unable  to  perceive  any  such 
right,  especially  in  a  case  of  this  kind,  where  no  other  person 
can  claim  the  money. 

If   it    should   be    urged    that    the   allegations    of    the    complaint 
show    that   there    are    no    legal    stockholders,    and    no    legal    stock 


PITTSBURGH    MINING   CO.   V.   SPOON ER,  63 

issued,  and  so  no  corporation  which  can  maintain  this  action,  it 
is  answered  by  saying  that  the  defendants  are  in  no  position  to 
attack  either  the  issue  of  the  stock  or  the  illegaHty  of  the  organi- 
zation   of    the    corporation.      These    defendants,    who    were    the 
active  agents  in  the   formation  of  the  corporation,  who  were  in- 
strumental   in    the    issue    of    the    alleged    illegal    stock,    and    who 
contracted  with  the  corporation,  having   full  knowledge  of  all  of 
its   transactions,   are   in   no   position   to   contest   the   regularity   of 
the  formation  of  the  corporation.     2  Mor.  Priv.  Corp.  §§  750-754. 
and  the  numerous  cases  cited  in  the  notes;  Chubb  v.  Upton,  95 
U.  S.  665-667;  Cowell  V.  Springs  Co.,  100  U.  S.  55,  60;  People 
V.  La  Rue.  67  Cal.  526,  8  Pac.  Rep.  84.     In  my  view  of  the  case, 
these  defendants. _  as  agents  and  trustees  of  the  corporation,  sold 
their   mining   option    to    the   corporation,    and    received    from    the 
corporation  $70,000  in   money   of  the   corporation   more  than   in 
law  and  equity  they  were  entitled  to  receive  therefor ;  and  in  law 
and  equity  they  hold  this  money  in  trust  for  the  corporation  from 
Avhich   they   received  it.     That   the   defendants,   after  having  ob- 
tained from  the  corporation  its  money,  which,  in  accordance  with 
the  principles  of  equity,  they  have  no  right  to  retain,  may  now 
refuse  to  refund  on  the  allegation  that  the  corporation  was  not 
in  all  respects  organized  in  accordance  with  law,  seems  to  me  a 
proposition    wholly    unsupported    by    authority,    and    contrary    to 
justice  and  equity.     Under  a  proper  construction  of  the  allega- 
tions of  the  complaint,  the  illegal  issue  of  the  stock  by  the  cor- 
poration,  and   the   receipt   of  the   money   for   such   stock,   was   a 
completed  transaction  before  the  acts  upon  which  the  corporation 
rely    for   a    recovery   against   the   defendants    transpired;    and    so 
the  illegal  act  is  in  no  way  the  foundation  of  the  action.     Briefly, 
the  foundation  of  the  claim  of  the  plaintifif  is  this:     The  corpora- 
tion  having  in  its  possession  $90,000,   the  defendants,  as  agents 
and   trustees   of  the   corporation,   sold   their   mining   claim   to   the 
corporation    for    $90,000.    and.    acting    for    the    corporation,    they 
bought  it  for  the  corporation,  and  paid  out  its  money  to  complete 
the  purchase;  and  that,  in  making  such  sale  and  purchase,  thev 
so  conducted  themselves  that  they  were  and  are  not  entitled,  as 
against   the  corporation,   to   retain   the   profits   made   on   the   sale, 
but   hold   such  profits   in  trust   for  the   corporation.     Under   such 
circumstances,  it   appears  to  me  wholly  immaterial   how   the  cor- 
poration became  possessed  of  the  money  received  by  the  defend- 
ants,  unless^  they  can  show  that  some  other  person'  or  party  has 
a  better  claim  to  such  money  than  the  corporation. 
^  I  have  not  discussed  the  question  as  to  the  right  of  the  corpora- 
tion to  recover  the  money  on  the  theory  that  they  collected  the 
same  as  the  agents  of  the  corporation,  for  the  benefit  of  the  cor- 
poration, and  now  hold  it  as  such  agent,  because  it  seems  to  me 
that  a    fair  construction   of  the   allegations   of  the   complaint   do 
not  show  that  such  is  the  position  of  the  defendants.     If.  under 
the  allegations  of  the  complaint,  these  defendants  ever  held  this 


64  PROMOTERS. 

money  as  the  agents  of  the  corporation,  they  abandoned  that 
position  when  they  received  it  from  the  corporation  as  the  pur- 
chase price  of  their  mining  option;  and  if  they  are  entitled  to 
hold  the  money  at  all  they  must  hold  it  as  vendors  of  such 
option,  and  as  the  purchase  money  thereof;  and  if  they  cannot, 
according  to  the  rules  of  law  and  equity,  hold  it  as  such  purchase 
money,  then  they  must  return  it  to  the  corporation.  They  can- 
not now  assume  to  hold  it  as  the  agents  of  the  corporation.  In 
receiving  the  money  as  the  purchase  price  of  their  option,  they 
abandoned  their  position  as  agents  of  the  corporation,  if  they 
ever  were  such  as  to  this  money,  and  cannot  now  assume  such 
agency  to  defeat  a  recovery.  Fox  v.  Cash,  ii  Pa.  St.  207;  2 
Benj.  Sales,  681.  We  think  the  complaint  states  a  good  cause  of 
action  in  favor  of  the  plaintiff,  and  that  the  circuit  court  erred 
in  sustaining  the  demurrer  to  the  complaint.  The  order  of  the 
circuit  court  is  reversed,  and  the  cause  is  remanded  for  further 
proceedings  according  to  law. 
Lyon,  J.,  dissents. 


CHAPTER  IV. 

CORPORATIONS     EXISTING     WITHOUT     LEGAL     RIGHT. 

Section  1. — The  De  Facto  Doctrine. 

STOUT  V.  ZULICK. 

1886.     48  X.  J.  L.  599.  7  Atl.  362. 

De  Facto  Corporation — Stockholders  Not  Personally  Liable. 

THE  CHANCELLOR.— The  plaintiffs  in  error,  who  were 
plaintiffs  below,  seek  to  recover  from  the  defendants  the  amount 
of  a  bill  of  goods  sold  by  them  to  the  New  Jersey  and  Sonora 
Reduction  Company.  The  goods  were  sold  in  New  York  to  the 
company,  September  16,  1884,  upon  the  order  of  its  purchasing 
agent,  and  were  charged  to  the  company  upon  the  plaintiffs' 
books  of  account,  and  the  plaintiffs  accepted  the  note  of  the  com- 
pany at  two  months,  signed  by  the  treasurer  for  the  price,  and 
the  goods  were  shipped  to  the  company  at  Sonora,  in  Mexico. 
The  note  has  not  been  paid.  The  plaintiff  brought  suit  for  the 
price  of  the  goods  against  the  defendants,  who  were  the  persons 
who  signed,  as  stockholders,  a  certificate  of  incorporation,  dated 
August  4th,  1883,  the  object  of  which  was  to  incorporate  the 
company  under  the  provisions  of  the  act  "concerning  corpora- 
tions." The  ground  upon  which  the  plaintiffs  base  their  claim 
of  liability  on  the  part  of  the  defendants  is  that  the  proceedings 
for  incorporation  were  not  in  compliance  with  the  provisions  of 
the  act  applicable  to  the  subject.  The  act  provides  for  the  in- 
corporation of  any  company  of  three  or  more  persons  associating 
themselves  together  for  any  lawful  business  or  purpose.  The 
steps  to  be  taken  are  the  making,  recording  and  filing  of  a  cer- 
tificate which  is  to  be  proved  or  acknowledged  and  recorded  as 
required  in  case  of  deeds  of  real  estate.  In  this  case  the  cer- 
tificate of  acknowledgment  of  one  of  the  defendants,  W'illard 
Richards,  does  not  state  that  the  contents  of  the  certificate  of 
incorporation  were  made  known  to  him  by  the  officer  taking  the 
acknowledgment  (a  notary  public  of  Saratoga  county,  in  the 
State  of  New  York),  and  the  accompanying  certificate  of  au- 
thentication of  the  notarial  act  by  the  clerk  of  the  courts  of  that 
county  does  not  state  that  the  notary  was  authorized  by  the  laws 
of  New  York  to  take  acknowledgments  and  proofs  of  deeds  or 
conveyances  for  lands,  tenements  or  hereditaments  in  that  state, 
which  statement  is  required  by  the  supplement  to  the  act  re- 
specting conveyances.   (Rev.,  p.   1280,)   in  case  of  deed  for  land, 

5 — Private  Corp.  65 


66  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

the  acknowledgment  or  proof  of  w^hich  is  taken  in  another  state 
or  territory  before  an  officer  so  authorized.  By  reason  and  solely 
on  account  of  those  alleged  defects,  the  plaintiffs  insist  that  the 
certificate  of  incorporation  is  a  nullity,  and  that  the  defendants 
are  consequently  liable  as  partners  for  the  price  of  the  goods. 

It  will  have  been  seen  that  the  goods  were  not  sold  to  the  de- 
fendants, but  to  the  company  to  which  the  credit  was  given,  and 
to  which  they  were  charged  upon  the  plaintiffs'  books,  and  for 
the  price  of  which  the  plaintiffs  accepted  a  note  of  the  company, 
signed  by  the  treasurer.  The  contract  was  not  with  the  defend- 
ants, but  with  the  company,  and  the  defendants  were  guilty  of  no 
fraud.  None  is  imputed,  but,  as  before  mentioned,  the  claim  of 
liability  is  based  entirely  upon  the  proposition  that  the  proceed- 
ings intended  to  effect  the  incorporation  are,  because  of  the  al- 
leged defects  before  referred  to,  a  nullity.  In  the  absence  of  a 
statutory  provision  making  shareholders  liable  in  case  of  failure 
to  comply  with  the  requirements  of  the  charter,  or  with  the  re- 
quirements of  the  act  under  which  the  company  is  incorporated, 
persons  who  have  contracted  with  a  de  facto  corporation,  as  a 
corporation,  cannot  deny  its  corporate  existence  in  order  to  charge 
its  shareholders  individually  as  partners.  Taylor  on  Corp.,  § 
739.  See,  also.  Fay  v.  Noble,  7  Cush.  188.  Where  it  is  shown 
that  there  is  a  charter  or  a  law  under  which  a  corporation  with 
the  powers  assumed  might  lawfully  be  incorporated,  and  there  is 
a  colorable  compliance  with  the  requirements  of  the  charter  or 
law,  the  existence  of  a  corporation  de  facto  is  established.  Meth- 
odist Church  V.  Pickett,  19  N.  Y.  482;  Buffalo  and  Allegheny 
R.  R.  Co.  V.  Cary,  26  N.  Y.  75.  And  it  is  entirely  settled  that 
the  corporate  existence  of  such  corporation  de  facto  cannot  be 
inquired  into  collaterally.  It  is,  as  to  all  who  contract  with  it, 
to  be  assumed  to  be  a  corporation  de  jure.  The  legality  of  its 
corporate  existence  may  be  inquired  into  by  the  state,  but  not 
by  anyone  else.  And  this  is  as  true  where  the  corporation  is 
formed  under  a  general  law  as  it  is  where  the  corporate  exist- 
ence is  claimed  under  a  special  charter.  Cochran  v.  Arnold,  58 
Penna.  St.  399;  Eaton  v.  Aspinwall,  19  N.  Y.  119.  Had  this 
suit  been  brought  against  the  company  it  could  not  have  denied 
its  corporate  existence ;  neither  can  the  plaintiffs,  who  contracted 
with  it  as  a  corporation,  do  so.  Taylor  on  Corp.,  §  146;  Swart- 
wout  V.  Michigan  Air  Line  R.  R.  Co.,  24  Mich.  389;  Rafferty, 
Receiver,  v.  Bank  of  Jersey  City,  4  Vroom,  368.  Our  act  pro- 
vides that  upon  making  the  certificate  and  causing  it  to  be 
recorded  and  filed,  the  persons  so  associating,  their  successors 
and  assigns,  shall  be,  from  the  time  of  commencement  of  the 
corporate  existence  fixed  in  the  certificate,  and  until  the  time 
limited  therein  for  the  termination  thereof,  incorporated  into  a 
company  by  the  name  mentioned  in  the  certificate.  The  time 
fixed  for  such  termination  in  this  case  was  August  4,  1933.  The 
law  authorized  the  formation  of  the  corporation;  the  proceeding 


STOUT    V.    ZULICK.  6/ 

purported  to  be  in  compliance  with  the  requirements  of  the  law, 
the  certificate  was  made,  recorded  and  filed,  and  the  company 
claimed  the  right  to  exercise  the  powers  conferred  upon  corpora- 
tions duly  created  under  the  law,  and  it  exercised  them  accord- 
inijlv.  The  transaction  under  consideration  furnishes  an  instance 
of  such  user.  The  company  was  a  corporation  de  facto,  and 
the  plaintiffs,  who  contracted  with  it,  cannot  be  permitted  to 
deny  the  legality  of  its  existence.  The  state  alone  can  call  that 
in  question.  Xor  are  the  cases  (Hill  v.  Beach,  i  Beas.  31,  and 
Booth  V.  Wonderly.  7  Vroom,  250),  cited  by  plaintiffs'  counsel, 
in  anywise  opposed  to  the  views  above  expressed.  In  the  former, 
persons  who  associated  themselves  together  for  the  purpose  of 
carrying  on  the  quarrying  business  in  this  state,  took  proceed- 
ings to  incorporate  themselves  into  a  company  under  a  general 
corporation  law  of  New  York.  They  were  held  liable  as  part- 
ners upon  the  ground  that  they  were  not  a  corporation,  the 
Chancellor  saying  that  they  were  not  a  domestic  corporation  and 
could  not  be  sued  as  such,  and  that  they  were  not  a  foreign  cor- 
poration, for  it  was  perfectly  manifest  upon  the  face  of  their 
proceedings  that  their  attempted  organization  under  the  general 
law  of  New  York  was  a  fraud  upon  that  law.  In  Booth  v. 
Wonderly,  persons  who  had  got  control  of  a  special  charter  cre- 
ating a  corporation  to  be  located  in  Trenton,  but  who  were  not 
named  as  corporators  therein,  attempted  to  iise  it  to  establish  a 
company  under  it,  to  be  located  at  Jersey  City,  and  to  give  such 
company  a  corporate  color  under  that  charter.  The  court  said 
that  the  company  had  some  semblance  of  a  corporation  in  name, 
form  of  organization,  and  assumption  of  a  seal,  yet  not  enough 
to  give  it  a  de  facto  corporate  existence ;  that  the  attempt  to 
establish  the  company  in  Jersey  City  under  the  charter  was  a 
palpable  and  entire  perversion  of  the  object  of  the  act,  and  a 
fraud  upon  the  act ;  that  it  gave  no  corporate  color  to  the  com- 
pany ;  that  the  doctrine  that  the  organization  cannot  be  inquired 
into  collaterally  had  no  application  to  that  case,  because  the  char- 
ter did  not  fit  the  company  and  was  not  intended  for  it,  and 
that  the  organization  was  entirely  outside  of  the  act  and  had 
no  existence  as  a  corporation,  real  or  de  facto.  It  will  have  been 
seen  that  in  each  case  the  ratio  decidendi  was  that  the  pretended 
incorporation  was  a  fraud  upon  the  act  under  which  the  defend- 
ants claimed  corporate  existence.  The  judgment  of  the  Circuit 
Court  should  be  affirmed. 


68  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

FINNEGAN  v.   KNIGHTS   OF  LABOR   BUILDING   ASSO- 
CIATION. 

1893.     52  Minn.  239,  53  N.  W.  1150,  18  L.  R.  A.  778,  38  Am. 

St.   552. 

Essentials  of  De  Facto  Corporation. 

GILFILLAN,  C.  J. :  Eight  persons  signed,  acknowledged,  and 
caused  to  be  filed  and  recorded  in  the  office  of  the  city  clerk  in 
Minneapolis,  articles  assuming  and  purporting  to  form,  under 
Laws  1870,  c.  29,  a  corporation,  for  the  purpose,  as  specified  in 
them,  of  "buying,  owning,  improving,  selling  and  leasing,  of 
lands,  tenements,  and  hereditaments,  real,  personal,  and  mixed 
estates  and  property,  including  the  construction  and  leasing  of  a 
building  in  the  city  of  Alinneapolis,  Minn.,  as  a  hall  to  aid  and 
carry  out  the  general  purposes  of  the  organization  known  as  the 
"Knights  of  Labor."  The  association  received  subscriptions  to 
its  capital  stock,  elected  directors  and  a  board  of  managers, 
adopted  by-laws,  bought  a  lot,  erected  a  building  on  it,  and,  when 
completed,  rented  different  parts  of  it  to  different  parties.  The 
plaintiff  furnished  plumbing  for  the  building  during  its  con- 
struction amounting  to  $599.50,  for  which  he  brings  this  action 
against  several  subscribers  to  the  stock,  as  copartners  doing  busi- 
ness under  the  firm  name  of  the  "K.  of  L.  Building  Association." 
The  theory  upon  which  the  action  is  brought  is  that,  the  associa- 
tion having  failed  to  become  a  corporation,  it  is  in  law  a  part- 
nership, and  the  members  liable  as  partners  for  the  debts  incurred 
by  it. 

It  is  claimed  that  the  association  was  not  an  incorporation 
because — First,  the  act  under  which  it  attempted  to  become  in- 
corporated, to  wit.  Laws  1870,  c.  29,  is  void,  because  its  sub- 
ject is  not  properly  expressed  in  the  title ;  second,  the  act  does 
not  authorize  the  formation  of  corporations  for  the  purpose  or 
to  transact  the  business  stated  in  the  articles ;  third,  the  place 
where  the  business  was  to  be  carried  on  was  not  distinctly  stated 
in  the  articles,  and  they  had,  perhaps,  some  other  minor  defects. 

It  is  unnecessary  to  consider  whether  this  was  a  de  jure  cor- 
poration, so  that  it  could  defend  against  a  quo  warranto,  or  an 
action  in  the  nature  of  quo  warranto,  in  behalf  of  the  state;  for, 
although  an  association  may  not  be  able  to  justify  itself  when 
called  on  by  the  state  to  show  by  what  authority  it  assumes  to 
be,  and  act  as,  a  corporation,  it  may  be  so  far  a  corporation 
that,  for  reasons  of  public  policy,  no  one  but  the  state  will  be 
permitted  to  call  in  question  the  lawfulness  of  its  organization. 
Such  is  what  is  termed  a  corporation  de  facto — that  is,  a  cor- 
poration from  the  fact  of  its  acting  as  such,  though  not  in  law 
or  of  right  a  corporation.  What  is  essential  to  constitute  a  body 
of  men  a  de  facto  corporation  is  stated  by  Selden,  J.,  in  Metho- 


FINNEGAN   V.    KNIGHTS   OF   LABOR   BUILDING   ASSOCIATION.         69 

dist,  etc.,  Church  v.  Pickett,  19  N.  Y.  482,  as  "(i)  the  existence 
of  a  charter  or  some  law  under  which  a  corporation  with  the 
powers  assumed  might  lawfully  be  created;  and  (2)  a  user  by 
the  party  to  the  suit  of  the  rights  claimed  to  be  conferred  by 
such  charter  or  law."  This  statement  was  apparently  adopted 
by  this  court  in  East  Norway  Church  v.  Froislie,  37  Minn.  447, 
35  N.  W.  Rep.  260;  but,  as  it  leaves  out  of  account  any  attempt 
to  organize  under  the  charter  or  law,  we  think  the  statement  of 
what  is  essential  defective.  The  definition  in  Taylor  on  Private 
Corporations  (page  145)  is  more  nearly  accurate:  "When  a 
body  of  men  are  acting  as  a  corporation,  under  color  of  apparent 
organization,  in  pursuance  of  some  charter  or  enabling  act, 
their  authority  to  act  as  a  corporation  cannot  be  questioned 
collaterally."  To  give  to  a  body  of  men  assuming  to  act  as  a 
corporation,  where  there  has  been  no  attempt  to  comply  with 
the  provisions  of  any  law  authorizing  them  to  become  such,  the 
status  of  a  de  facto  corporation  might  open  the  door  to  frauds 
upon  the  public.  It  would  certainly  be  impolitic  to  permit  a 
number  of  men  to  have  the  status  of  a  corporation  to  any  extent 
merely  because  there  is  a  law  under  which  they  might  have 
become  incorporated,  and  they  have  agreed  among  themselves  to 
act,  and  they  have  acted,  as  a  corporation.  That  was  the  con- 
dition in  Johnson  v.  Corser,  34  Minn.  355,  25  N.  W.  Rep.  799, 
in  which  it  was  held  that  what  had  been  done  was  ineffectual  to 
limit  the  individual  liability  of  the  associates.  They  had  not 
gone  far  enough  to  become  a  de  facto  corporation.  They  had 
merely  signed  articles,  but  had  not  attempted  to  give  them 
publicity  by  filing  for  record,  which  the  statute  required.  "Color 
of  apparent  organization  under  some  charter  or  enabling  act" 
does  not  mean  that  there  shall  have  been  a  full  compliance  with 
what  the  law  requires  to  be  done,  nor  a  substantial  compliance. 
A  substantial  compliance  will  make  a  corporation  de  jure.  But 
there  must  be  an  apparent  attempt  to  perfect  an  organization 
under  the  law.  There  being  such  apparent  attempt  to  perfect  an 
organization,  the  failure  as  to  some  substantial  requirement  will 
prevent  the  body  being  a  corporation  de  jure;  but,  if  there  be 
user  pursuant  to  such  attempted  organization,  it  will  not  pre- 
vent it  being  a  corporation  de  facto. 

The  title  to  chapter  29  is  "An  act  in  relation  to  the  formation 
of  co-operative  associations."  Appellant's  counsel  argues  that 
the  body  of  the  act  does  not  contain  a  single  element  of  co-opera- 
tion," as  that  term  is  generally  understood.  But  how  it  is  gen- 
erally understood  he  does  not  inform  us.  In  a  broad  sense,  all 
associations,  whether  corporations  or  partnerships,  are  co-opera- 
tive, for  all  the  members,  either  by  their  labor  or  capital,  or  both, 
co-operate  to  a  common  purpose.  There  is  undoubtedly,  in  popu- 
lar use  of  the  terms,  a  more  limited  sense,  thougli  the  precise 
limits  are  not  well  defined.  There  is  no  legal,  as  distinguishable 
from  their  popular,  signification.     In  the  Century  Dictionary  the 


70  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

term  "co-operative  society"  is  defined,  "A  union  of  individuals, 
commonly  laborers  or  small  capitalists,  formed  *  *  *  fgr  the 
prosecution  in  common  of  a  productive  enterprise,  the  profits 
being  shared  in  accordance  with  the  amount  of  capital  or  labor 
contributed  by  each  member."  Taking  the  distinctive  feature  of 
a  co-operative  society  to  be  that  it  is  made  up  of  laborers  or  small 
capitalists,  it  is  manifest  that  the  chapter  intends  to  deal  with 
just  that  sort  of  associations.  Not  only  does  it  contemplate  that 
the  operations  of  the  corporations  shall  be  local,  but  the  capital 
stock  is  limited  to  $50,000,  the  stock  which  one  member  may 
hold  to  $1,000.  No  one  can  become  a  shareholder  without  the 
consent  of  the  managers,  and  no  one  is  entitled  to  more  than  one 
vote.  The  provisions  in  the  body  of  the  act  are  in  accord  with 
the  title,  and  it  is  therefore  not  open  to  the  objection  made  against 
it.  The  purposes  for  which,  under  the  act,  corporations  may  be 
formed,  are  "of  trade,  or  of  carrying  on  any  lawful  mechanical, 
manufacturing,  or  agricultural  business."  The  main  purpose  _  of 
the  act  being  to  enable  men  of  small  capital,  or  of  no  capital 
but  their  labor  and  their  skill  in  trades,  to  form  corporations,  for 
the  purpose  of  giving  employment  to  such  capital  or  labor  and 
skill,  the  language  expressing  the  purposes  for  which  such  cor- 
porations may  be  formed  ought  not  to  be  narrowly  construed. 
Giving  a  reasonably  liberal  meaning  to  the  word  "trade"  in  the 
act,  it  would  include  the  buying  and  selling  of  real  estate,  and, 
upon  a  similar  construction  the  word  "mechanical"  would  include 
the  erection  of  buildings.  The  doing  of  the  mason,  or  brick,  or 
carpenter,  or  any  other  work  upon  a  building  is  certainly  me- 
chanical. There  can  be  little  question  that  corporations  might 
be  formed  to  do  either  of  those  kinds  of  work  on  buildings,  and. 
that  being  so,  there  is  no  reason  why  they  may  not  be  formed 
to  do  all  of  them.  There  is  no  reason  to  claim  that  such  a 
corporation  must  do  its  work  as  a  contractor  for  some  other 
person.  It  may  do  it  for  itself,  and,  as  the  act  authorizes  the  cor- 
poration to  "take,  hold,  and  convey  such  real  and  personal  estate 
as  is  necessary  for  the  purposes  of  its  organization,"  it  may, 
instead  of  working  for  others  as  a  contractor,  make  its  profit  by 
buying  real  estate,  erecting  buildings  on  it,  and  either  selling  or 
liolding  them  for  leasing.  The  omission  to  state  distinctly  in 
the  articles  the  place  within  which  the  business  is  to  be  carried 
on,  though  that  might  be  essential  to  make  it  a  de  jure  corpora- 
tion, would  not  prevent  it  becoming  one  de  facto.  The  founda- 
tion for  a  de  facto  corporation  having  been  laid  by  the  attempt 
to  organize  under  the  law,  the  user  shown  was  sufficient.  Judg- 
ment affirmed.^ 

*  There  must  always  be  at  least  a  colorable  attempt  in  good  faith  to 
comply  with  the  law's  requirements.  For  a  good  recent  instance  of 
what  will  not  be  deemed  sufficient,  see  Stevens  v.  Episcopal  Church 
History  Co.,  140  App.  Div.  (N.  Y.)  570.— Ed. 


SOCIliTV    P1:RUN'    v.    CLEVELAND.  7I 

^   SOCIETY   PERUN  v.   CLEVEI.AND. 
1885.     43  Ohio  St.  481.  3  X-  E.  357. 
Dc    Facto    Corporation    as   a    Reality. 

Error  to  the  District  Court  of  Cuyahoga  county. 

On  the  28th  of  January,  1874,  the  city  of  Cleveland  conveyed 
to  Perun  (an  incorporated  school  and  library  society),  certain  real 
estate  situated  in  that  city,  and  to  secure  the  unpaid  purchase- 
money  therefor,  Perun.  on  the  same  date,  executed  and  delivered 
to  the  city  its  four  promissory  notes  and  a  mortgage  upon  the 
premises  conveyed. 

The  city  neglected  to  file  this  mortgage  for  record  until  the  21st 
day  of  October.  1879.  In  February.  1874.  certain  persons  at- 
tempted to  organize  a  mutual  benefit  association  under  an  act 
supplementary  to  an  act  to  provide  for  the  creation  and  regula- 
tion of  incorporate  companies  passed  May  i.  1852  (S.  &  C.  Stat. 
271).  passed  April  20.  1872  (69  Ohio  L.  82),  under  the  corporate 
name  of  Society  Perun.  Thereafter,  in  May,  1874.  Perun  deliv- 
ered to  Society  Perun  its  deed  purporting  to  convey  to  the  latter 
the  premises  theretofore  mortgaged  to  the  city.  From  that  time 
forward,  and  prior  to  the  filing  of  the  city's  mortgage  for  record, 
Society  Perun,  acting  in  its  supposed  corporate  capacity,  from 
time  to  time,  executed  and  delivered  deeds,  mortgages,  and  execu- 
tory contracts  of  sale,  purporting  to  convey,  incumber  and  sell 
parcels  of  these  mortgaged  premises  to  various  parties,  who  were 
made  defendants  in  tlie  action  below,  and  some  of  whom  (in- 
cluding Amasa  Stone,  a  mortgagee,  and  who  had  paid  taxes  upon 
the  premises  mortgaged  to  him),  are  cross-petitioners  in  error. 
Thereafter,^  in  June.  1880.  in  a  proceeding  in  quo  warranto,  in 
this  court,  instituted  by  the  Attorney-General.  Society  Perun  was 
adjudged  not  to  have  become  incorporated  in  conformity  to  the 
laws  of  this  state,  but  that  its  pretended  incorporation'  was  in 
violation  thereof;  and  it  was  accordingly  ousted  of  all  rights  and 
franchises  to  be  a  corporation. 

These  proceedings  in  quo  warranto  were  had  pending,  and  prior 
to  the  final  judgment  in  the  action  below,  which  was  brought  by 
the  city  to  foreclose  her  mortgage,  and  also  to  foreclose  her  sup- 
posed vendor's  lien  on  the  mortgaged  premises,  as  against  these 
subsequent  grantees,  mortgagees,  and  purchasers. 

The  cause  was  appealed  from  the  court  of  common  pleas  to  the 
district  court,  wherein  it  was  tried  upon  the  issues,  the  court  find- 
ing among  other  things,  that,  as  to  the  city  of  Cleveland.  Society 
Perun  was  not  a  corporation  either  in  law  or  in  fact,  and  that  the 
conveyance  to  it  by  Perun  was  void  a^  against  the  city :  and  that 
the  mortgages  and  other  liens  and  claims  of  all  the  defendants 
(except  the  lien  of  Amasa  Stone  for  taxes,  and  the  claims  of  cer- 
tain defendants  for  improvements  on  the  premises),  were  subse- 


'J2  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

quent  and  inferior  to  the  lien  of  the  city,  in  whose  favor  the 
court  adjudged  the  second  hen,  and  subsequent  only  to  the  lien  of 
Amasa  Stone  for  taxes  paid  by  him,  but  of  equal  rank  and  merit 
with  the  holders  of  hens  for  expenditures  on  account  of  improve- 
ments above  mentioned. 

By  the  judgment  in  the  quo  warranto  proceeding  it  was  by  this 
court  in  form  adjudged  that  the  defendants  (the  pretended  in- 
corporators) ever  since  their  pretended  incorporation,  had  unlaw- 
fully and  without  authority  exercised  the  franchises  of,  and 
usurped  the  right  to  be,  a  body  corporate;  that  the  pretended  or- 
ganization of  these  defendants  as  a  corporation  was  wholly  void 
and  of  no  effect,  and  vested  in  them  no  corporate  rights,  powers, 
privileges,  or  franchises  of  any  description  whatever. 

It  was  further  in  form  adjudged  that  the  defendants  never  had, 
nor  had  any  of  them,  the  authority  or  lawful  right  to  be  a  body 
corporate  or  to  exercise  or  hold  any  of  the  powers,  rights  and 
liberties,  privileges,  functions  or  franchises  of  a  body  corporate; 
but  that  they  and  each  of  them  in  the  use  and  exercise  of  the 
same  were  and  had  ever  been  usurpers  thereof.  The  sole  ground 
upon  which  this  judgment  of  ouster  was  rendered  was  that  while 
the  statute  required  that  they  should  set  forth  in  their  certificate 
of  incorporation  (among  other  things)  the  manner  of  carrying 
on  the  business  of  the  association,  the  attempted  compliance  with 
this  requirement  was  in  these  words: 

"Third.  That  the  manner  of  carrying  on  business  of  said  asso- 
ciation shall  be  such  as  may  be  from  time  to  time  prescribed  by 
the  by-laws  of  such  association;  provided  that  the  same  shall  not 
be  inconsistent  with  the  laws  of  the  state  of  Ohio." 

Upon  the  trial  below  the  plaintiff  gave  in  evidence,  against  the 
objection  of  defendants,  the  record  of  the  quo  warranto  proceed- 
ings. 

The  defendants  offered  in  evidence  the  writing  which  was  filed 
with  the  secretary  of  state  as  the  certificate  of  incorporation  of 
Society  Perun. 

They  also  offered  to  prove  that  the  pretended  incorporators 
proceeded  to  comply  strictly  with  the  requirements  of  the  statutes; 
that  tlTey  elected  trustees,  prepared  a  certificate  of  incorporation 
stating  explicitly  the  manner  of  carrying  on  the  business ;  that  this 
was  forwarded  to  the  secretary  of  the  state,  who  submitted  it  to 
the  attorney-general  for  examination  and  approval ;  that  the  sec- 
retary of  state  returned  this  paper  with  another  form  of  certifi- 
cate which  had  been  approved  by  the  attorney-general  and  secre- 
tary of  state,  and  which  was  the  identical  certificate  actually  filed 
with  the  secretary  of  state,  and  under  the  supposed  authority  of 
which  an  organization  was  in  good  faith  attempted,  and  that  they 
proceeded  in  good  faith  to  act  and  transact  its  business  under  the 
supposed  authority  of  such  incorporation. 

All   this  was   excluded,   and   the   defendants   excepted.     To  re- 
verse this  judgment  the  present  proceeding  is  prosecuted. 


SOCIETY    PERUN    V.    CLEVELAND.  73 

The  alleged  errors  chiefly  relied  upon  are  the  exclusion  of  the 
evidence  offered  to  prove  an  attempt,  in  good  faith,  to  incorporate 
Society  Perun ;  the  finding  and  holding  of  the  court  that  Society 
Perun  had  never  been  in  law  or  fact  a  corporation;  that  as 
against  the  city  the  deed  from  Perun  was  void;  and  adjudging 
the  city's  lien  to  be  prior  to  the  rights  and  liens  of  Society  Perun 
and  its  mortgagees,  grantees  and  purchasers. 

OWEX,  J. — The  defendants  below,  conceding  that  Society 
Perun  had  never  been  a  corporation  de  jure,  maintain  that  the 
court  below  should  have  permitted  them  to  prove  that  such  society 
was  a  de  facto  corporation ;  that  it  attempted,  in  good  faith,  to 
become  a  body  corporate ;  proceeded  to  act  and  transact  business 
in  good  faith  under  the  supposed  authority  of  incorporation,  and 
that  its  acts  ought  not  to  have  been  declared  to  be  wholly  void 
as  against  the  city  of  Cleveland. 

The  judgment  of  ouster  was  an  adjudication  between  the  state 
and  the  society  upon  the  right  of  the  latter  to  exercise  corporate 
franchises.  For  the  purposes  of  such  adjudication  it  was  com- 
petent for  this  court  to  consider  and  determine  what  had  been 
its  status  from  its  first  attempt  to  incorporate.  But  it  had  no 
power  to  pass  upon  or  determine  the  rights  of  parties  not  be- 
fore it. 

It  was  not  competent  for  this  court  to  determine  in  that  pro- 
ceeding that  Society  Perun  had  never  been  a  corporation  de  facto, 
or  that  its  acts  and  business  transactions,  under  the  color  of  its 
supposed  charter  powers,  were  void.  The  authority  of  the  court 
in  that  behalf  was  derived  from  sec.  6774  (Rev.  Stats.),  which 
provides :  "WHien  a  defendant  is  found  guilty  of  usurping,  in- 
truding into,  or  unlawfully  holding  or  exercising  an  office,  fran- 
chise, or  privilege,  judgment  shall  be  rendered  that  such  defend- 
ant be  ousted  and  altogether  excluded  therefrom.,  and  that  the 
relator  recover  his  costs." 

When  the  court  had  excluded  the  society  from  its  franchises  to 
be  a  corporation,  it  exhausted  its  jurisdiction  over  the  subject- 
matter.  It  had  no  power  to  speak  concerning  whatever  rights 
may  have  been  acquired  by  the  society  as  a  corporation  de  facto, 
or  by  third  parties  in  their  transactions  with  it  as  an  acting 
corporation. 

It  is  conceded  by  the  city  that  parties  who  had  recognized  the 
existence  of  the  society  by  their  transactions  with  it  as  a  sup- 
posed corporation  are  estopped  to  deny  its  corporate  existence. 
But  it  is  maintained  that  the  city,  having  engaged  in  no  transac- 
tions with  it.  is  free  to  challenge  its  existence  as  a  corporation 
de  facto  as  well  as  de  jure.  The  argument  is  that:  "No  case 
can  be  found  where  it  is  held  that  there  is  a  corporation  de  facto 
against  persons  who  have  in  no  way  recognized  its  existence  as  a 
corporation,"  and  that:     "The  notion  of  a  de  facto  corporation  is 


74  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

based  on  the  doctrine  of  estoppel ;  when  estoppel  cannot  be  in- 
voked there  can  be  no  de  facto  corporation." 

The  theory  that  a  de  facto  corporation  has  no  real  existence, 
that  it  is  a  mere  phantom,  to  be  invoked  only  by  that  rule  of 
estoppel  which  forbids  a  party  who  has  dealt  with  a  pretended 
corporation  to  deny  its  corporate  existence,  has  no  foundation, 
either  in  reason  or  authority.  A  de  facto  corporation  is  a  reality. 
It  has  an  actual  and  substantial  legal  existence.  It  is,  as  the  term 
implies,  a  corporation. 

"It  is  a  self-evident  proposition  that  a  contract  cannot  be  made 
with  a  corporation  unless  the  corporation  be  in  existence  at  the 
time.  A  real  contract  with  an  imaginary  corporation  is  as  impos- 
sible, in  the  nature  of  things,  as  a  real  contract  with  an  imaginary 
person.  It  is  essential,  therefore,  in  order  to  establish  the  exist- 
ence of  a  contract  with  a  corporation,  to  show  that  the  corpora- 
tion was  in  existence,  at  least  de  facto,  at  the  time  the  contract 
was  made."     Morawetz    Private  Corporations,   §    137. 

It  is  bound  by  all  such  acts  as  it  might  rightfully  perform  as  a 
corporation  de  jure.  Where  it  has  attempted  in  good  faith  to  as- 
sume corporate  powers ;  where  its  proceedings  in  that  behalf  are 
colorable,  and  are  approved  by  those  officers  of  the  state  who  are 
authorized  to  act  in  that  regard ;  where  it  has  honestly  proceeded 
for  a  number  of  years,  without  interference  from  the  state,  to 
transact  business  as  a  corporation ;  has  been  reputed  and  dealt 
with  as  a  duly  incorporated  body,  and  valuable  rights  and  in- 
terests have  been  acquired  and  transferred  by  it,  no  substantial 
reason  is  suggested  why  its  corporate  existence,  in  a  suit  involving 
such  transactions,  should  be  subject  to  attack  by  any  other  party 
than  the  state,  and  then  only  when  it  is  called  upon  in  a  direct 
proceeding  for  that  purpose,  to  show  by  what  authority  it  as- 
sumes  to  be  a  corporation. 

Proof  was  offered  upon  the  trial  below  to  show  (i)  that  the 
persons  seeking  to  incorporate  first  filed  with  the  secretary  of 
state  a  certificate  which  fully  complied  with  the  requirements  of 
the  statutes,  and  free  from  the  defect  which  finally  proved  fatal 
to  its  existence,  but  which  was  disapproved  by  the  attorney-gen- 
eral; (2)  That  the  certificate  of  incorporation  which  was  finally 
filed  with  the  secretary  of  state  recited  that,  "said  association 
has  been  formed  and  organized  for  the  mutual  protection  and 
relief  of  its  members,  and  for  the  payment  of  stipulated  sums  of 
money  to  the  families  or  heirs  of  the  deceased  members  of  said 
association ;  that  the  officers  of  said  association  have  been  duly 
chosen;  that  for  the  purpose  of  becoming  a  body  corporate  under 
an  act  passed  by  the  general  assembly  of  the  state  of  Ohio,  en- 
titled, an  act  supplementary  to  an  act,  entitled  an  act  to  provide 
for  the  creation  and  regulation  of  incorporated  companies  in  the 
state  of  Ohio,  passed  May  i,  1852.  passed  April  20.  1872;"  (3) 
That  this  certificate  was  approved  by  the  secretary  of  state,  and 
also  by  the  attorney-general,  as  provided  by  the  statutes  (69  Ohio 


SOCIETY    PERUN    V.    CLEVELAND.  75 

L.  150)  ;  (4)  That  it  proceeded  in  good  faith  to  transact  business 
])eculiar  to  corporations  provided  for  by  the  act  under  which  it 
attempted  to  incorporate. 

All  this  was  excluded,  and  the  decision  of  the  court  below  prac- 
tically rested  on  the  proof  offered  by  the  city,  that  Society  Perun 
had  been  ousted  of  its  franchises,  which  was  evidently  construed 
as  determining  that  such  society  had  from  the  first  no  corporate 
existence,  either  de  jure  or  de  facto,  and  consequently  no  capacity 
to  receive  or  impart  any  interest  in  or  title  to  real  estate  except 
as  against  such  parties  as  were  by  reason  of  their  recognition  of 
or  dealings  with  it,  estopped  to  deny  its  incorporate  existence. 

Did  the  court  err?  This  fairly  presents  the  controlling  and  very 
important  question :  Was  it  competent  to  show,  as  against  a  party 
who  was  not  estopped  to  deny  its  corporate  existence,  that  Society 
Perun  was,  at  the  time  of  the  transactions  involved  in  controversy. 
a  corporation  de  facto? 

In  Attorney-General  ex  rel.  Pettee  v.  Stevens,  Saxton  (N.  J. 
E<1-)  369.  the  relator  sought  to  enjoin  the  Camden  and  Amboy 
R.  R.  and  Transportation  Co.  and  others  acting  under  its  author- 
ity from  erecting  a  bridge  over  a  navigable  stream.  The  claim 
was  that  the  act  authorizing  the  corporation  had  been  perverted 
and  disregarded,  and  that  there  was  no  legal  incorporation.  The 
relators  were  in  no  manner  estopped  to  attack  the  corporate  ex- 
istence of  the  respondent.     The  court  held : 

"Where  a  set  of  men  claiming  to  be  a  legally  incorporated  com- 
pany under  an  act  of  the  legislature,  have  done  everything  nec- 
essary to  constitute  them  a  corporation,  colorably  at  least,  if  not 
legally,  and  are  exercising  all  the  powers  and  functions  of  a  cor- 
poration; they  are  a  corporation,  de  facto,  if  not  de  jure;  and 
this  court  will  not  interfere,  in  an  incidental  way,  to  declare  all 
their  proceedings  void,  and  treat  them  as  a  body  having  no  rights 
or  powers." 

The  chancellor,  speaking  for  the  court,  said : 

"Here,  then,  is  a  set  of  men  claiming  to  be  a  legally  incorpora- 
ted company  under  the  act  of  the  legislature,  exercising  all  the 
powers  and  functions  of  a  corporation.  They  are  a  corporation 
de  facto,  if  not  de  jure.  Everything  necessary  to  constitute  them 
a  corporation  has  been  done,  colorably  at  least,  if  not  legally;  and 
T  do  not  feel  at  liberty,  in  this  incidental  way,  to  declare  all  their 
proceedings  void,  and  treat  them  as  a  body  having  no  rights  or 
powers.  It  has  been  seen  that  the  court  will  not  do  this  where 
a  corporation  properly  organized  has  plainly  forfeited  its  privi- 
leges ;  and  there  is  but  little  difference  in  principle  between  the 
two  cases.  In  both  the  corporation  is  actually  in  existence,  but 
whether  legally  and  rightfully  so  is  the  question.  And  it  appears 
to  me  that  if  the  court  can  take  cognizance  of  the  matter  in  this 
case,  it  must  in  all  others  where  it  can  be  brought  up.  not  only 
directly,  but  incidentally." 

This  case  is  approved  and  followed  in  National  Docks  R.  Co.  v. 


76  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

Central  R.  R.  Co.,  32  N.  J.  Eq.  755,  which  held:  "When  a  cor- 
poration exists  de  facto,  the  court  of  chancery  cannot,  at  the  in- 
stance of  private  parties,  restrain  its  operations  upon  the  ground 
that  its  organization  is  not  de  jure.  In  such  case  the  proper  rem- 
edy is  by  quo  warranto,  or  information  in  the  nature  thereof,  in- 
stituted by  the  attorney-general."  The  rule  of  estoppel  found  no 
place  in  this  case. 

In  S.  &  L.  G.  R.  Co.  v.  S.  &  C.  R.  R.  Co.,  45  Cal.  680,  it  was 
held  that:  "If  a  corporation  de  facto  is  in  the  actual  possession 
of  a  public  highway,  under  a  grant  of  a  franchise  to  improve 
and  collect  tolls  on  the  same,  a  mere  trespasser  cannot  justify  his 
entry  thereon  on  the  ground  that  it  was  only  a  corporation  de 
facto,  and  was  not  de  jure  entitled  to  the  franchise." 

In  Williams  v.  Kokomo  B.  &  L.  Ass'n,  89  Ind.  339,  one  Leach 
gave  to  an  acting  corporation  his  mortgage  on  real  estate.  Subse- 
quent to  the  execution  and  recording  of  it,  he  executed  another 
mortgage  on  the  same  land  to  Williamson.  In  a  proceeding  to 
foreclose  the  junior  mortgage,  Williamson  maintained  that  the 
pretended  corporation  had  no  legal  existence,  by  reason  of  defects 
and  omissions  in  the  proceedings  to  incorporate,  and  that  the 
senior  mortgage  was  void.  He  was  in  no  manner  estopped,  by 
dealings  with,  or  recognition  of,  the  first  mortgagee  to  deny  its 
corporate  existence.  The  court  held  that:  "A  junior  mortgagee 
cannot  defeat  a  senior  mortgage  by  showing  that  the  corporation 
to  which  the  senior  mortgage  was  executed  was  defectively  or- 
ganized, if  it  be  a  corporation  de  facto."  Elliot,  J.,  said:  "Where 
persons  assume  to  incorporate  under  the  laws  of  the  state,  and 
in  part  comply  with  their  requirements,  assume  corporate  func- 
tions and  transact  business  as  a  corporation,  private  persons  can 
not  collaterally  question  the  right  of  such  an  association  to  a 
corporate  existence,  although  there  has  not  been  a  full  compli- 
ance with  the  provisions  of  the  statute.  Baker  v.  Nefif,  73  Ind. 
68.  This  rule  is  not  limited  to  cases  zvhere  one  by  contract  ad- 
mits corporate  existence,  but  is  a  rule  of  general  application." 
It  is  not  easy  to  distinguish  the  principle  of  this  case  from  that 
of  the  case  at  bar. 

In  Pape  v.  Capitol  Bank,  20  Kan.  440,  Pape  and  wife  gave 
their  notes  to  "James  M.  Spencer  or  bearer,"  and  their  mortgage 
on  real  estate  to  secure  them.  Spencer  transferred  the  notes  to 
the  Capitol  Bank  of  Topeka,  an  acting  corporation,  with  this  in- 
dorsement: "Pay  the  bearer,  without  recourse  on  me;  James  M. 
Spencer."  The  mortgage  was  also  transferred  to  the  bank,  which 
proceeded  by  suit  to  collect  the  notes  and  foreclose  the  mortgage. 
Pape  and  wife  interposed  the  defense  that  the  bank  was  not,  and 
never  had  been,  a  body  corporate,  by  reason,  among  others,  of  a 
defective  organization.  The  bank  had  assumed  corporate  func- 
tions after  an  attempt,  in  good  faith,  to  incorporate,  and  for  a 
number  of  years  was  in  the  actual  and  notorious  exercise  of  cor- 
porate franchises.     Pape  had  transacted  banking  business  with  the 


SOCIETY    PERUN    V.    CLEVELAND.  'J'J 

plaintiff  prior  to  the  purchase  of  the  notes  and  mortgage,  but 
such  business  was  wholly  unconnected  with  the  notes  and  mort- 
gage in  suit.  His  wife,  however,  had  not  in  any  manner  recog- 
nized the  existence  of  the  bank  as  a  corporate  body,  and  the 
doctrine  of  estoppel  was  not  invoked  to  aid  the  court  in  sustain- 
ing a  judgment  of  foreclosure  against  Pape  and  wife.  Brewer, 
J.,  says:  "The  corporation  is  one  de  facto;  and  only  the  state 
can  inquire,  and  that,  in  a  direct  proceeding,  whether  it  be  one 
de  jure.  *  *  *  There  must,  in  such  cases,  be  a  law  under 
which  the  incorporation  can  be  had ;  there  must,  also,  be  an  at- 
tempt, in  good  faith,  on  the  part  of  the  corporators,  to  incorporate 
under  such  law;  and  when,  after  this,  there  has  been  for  a  series 
of  years  an  actual,  open,  and  notorious  exercise,  unchallenged  by 
the  state,  of  the  powers  of  a  corporation,  one  who  is  sued  on  a 
note  held  by  such  corporation  will  not  be  permitted  to  question 
the  validity  of  the  incorporation  as  a  defense  to  the  action.  No 
mere  matters  of  technical  omission  in  the  incorporation,  no  acts 
of  forfeiture  from  misuser  after  the  incorporation,  are  subjects 
of  inquiry  in  such  an  action.  This  is  not  upon  the  ground  of 
equitable  estoppel  but  upon  grounds  of  public  policy.  If  the 
state,  which  alone  can  grant  the  authority  to  incorporate,  remains 
silent  during  the  open  and  notorious  assertion  and  exercise  of 
corporate  powers,  an  individual  will  not,  unless  there  be  some 
powerful   equity  on  his   side,  be  permitted  to   raise  the  inquiry." 

In  Thompson  v.  Candor,  60  111.  244,  Willetts,  in  February, 
1858,  deeded  to  "Mercer  Collegiate  Institute,"  a  body  pretending 
to  be  a  corporation,  the  tract  of  land  in  controversy.  He  died  in 
jMarch,  1858.  In  1868  his  heirs  quitclaimed  their  interest  in  the 
land  to  Thompson,  who  filed  a  bill  in  chancery  for  the  cancellation 
of  the  deed  from  Willetts  to  the  "Institute,"  alleging,  as  one  of 
the  grounds  of  relief,  that  the  named  grantee  was  not  legally  in- 
corporated— had  no  capacity  to  take  the  title,  and  that  the  deed 
was  void.     The  court  held: 

"Where  parties  endeavor  to  organize  a  corporation  for  educa- 
tional purposes,  under  the  general  law,  adopt  a  name,  elect  trus- 
tees, and  organize  by  electing  a  president  and  officers,  and  the 
trustees  had  acted  for  years  in  managing  the  property,  had  leased 
and  mortgaged  it,  and  expended  a  large  sum  of  money  in  its 
improvement,  these  acts  constitute  it  a  corporate  body  de  facto, 
and  the  regularity  of  its  organization  cannot  be  questioned  col- 
laterally. Such  irregularity  can  only  be  questioned  by  quo  war- 
ranto or  scire  facias." 

Thornton,  J.,  says:  "In  1856  an  attempt  v^^as  made  to  organ- 
ize a  corporation  under  the  general  incorporation  law.  A  cor- 
porate name  was  selected,  trustees  were  appointed,  and  an  organi- 
zation effected  by  the  election  of  a  president  and  proper  officers. 
The  trustees  thus  appointed  acted  for  years  in  the  general  man- 
agement of  the  property,  leased  and  mortgaged  it,  and  expended 
a  large  amount  of  money.     Here  then  was  a  corporate  body  de 


78  CORPORATIONS    EXISTING    WITHOUT    LIZGAL    RIGHT. 

facto,  which  had  been  engaged  in  an  undertaking  involving  im- 
portant interests.  The  regularity  of  its  organization  cannot  be 
questioned  collaterally.  Any  alleged  non-compliance  with  the  law 
can  only  be  inquired  into  by  the  writ  of  quo  warranto  or  scire 
facias." 

There  is  no  suggestion  throughout  the  entire  case  of  the  rule 
of  estoppel  as  an  element  affecting  its  disposition. 

In  Paper  Works  v.  Willett,  i  Robertson  (N.  Y.  Sup.),  131,  it 
is  held  that  formal  defects  in  proceedings  to  organize  a  corpora- 
tion are  not  available  to  defeat  an  action  brought  by  a  corporation 
for  trespass  in  wrongfully  taking  property  out  of  its  possession. 

See  also,  as  illustrating  the  principle  under  discussion:  Smith 
V.  Sheeley,  12  Wall.  361 ;  Grand  Gulf  Bank  v.  Archer,  8  S.  &  M. 
151,  173;  Dunning  v.  R.  R.  Co.,  2  Carter  (Ind.)  437;  Danne- 
broge  Mining  Co.  v.  Aliment,  26  Cal.  286;  Searsburgh  Turnpike 
Co.  V.  Cutler,  6  Vt.  315;  Mitchell  v.  Deeds,  49  111.  416;  Eliz. 
Academy  v.  Lindsey,  6  Ired.  476;  Darst  v.  Gale,  83  111.  136; 
Rondell  v.  Fay,  32  Cal.  354;  De  Witt  v.  Hastings,  40  N.  Y. 
(Superior  Court)  463;  Rice  v.  R.  R.  Co.,  21  111.  93;  Douglas 
County  V.  Bolles,  94  U.  S.  104;  The  Banks  v.  Poitiaux,  3  Ran- 
dolph (Va.),  136;  Goundie  v.  Northampton  Water  Co.,  7  Pa.  St. 
233;  Baker  v.  Backus,  32  111.  79;  Tarbell  v.  Page,  24  111.  46; 
Thornburgh  v.  R.  R.  Co.,  14  Ind.  499;  Tar  River  Nav.  Co.  v. 
Neal,  3  Hawks,  520;  Bear  Camp  River  Co.  v.  Woodman,  2  Me. 
404. 

In  Jones  v.  Dana,  24  Barb.  395,  it  was  held  that  if  a  company 
has  in  form  a  charter  authorizing  it  to  act  as  a  body  corporate, 
and  is  in  fact  in  the  exercise  of  corporate  powers  at  the  time  of 
taking  a  note  from  an  individual,  it  is,  as  to  him  and  all  third 
persons,  a  corporation  de  facto,  and  the  validity  of  its  corporate 
existence  can  only  be  tested  by  proceedings  on  behalf  of  the 
people. 

In  the  case  at  bar,  the  certificate  which  was  last  filed  by  the 
society  embraced  a  full  statement  of  the  objects  of  incorporation 
and  indicated  what  the  nature  of  its  business  must  necessarily  be. 
and  was  strongly  suggestive  of  the  manner  in  which  it  must  nec- 
essarily be  transacted ;  and  while  it  is  not  our  purpose  to  call  in 
question  the  action  of  this  court  in  the  quo  warranto  proceedings, 
we  have  no  hesitation  in  saying  that  if  we  were  now  called  upon 
to  determine  whether  the  corporate  life  of  Society  Perun  should 
be  taken,  the  question,  upon  the  facts  offered  in  proof  at  the  trial 
below,  would  not  be  free  from  doubt  and  difficulty.  It  is  very 
clear  that  the  proceedings  to  incorporate  were  colorable;  and  so 
far  as  this  fact  is  a  test  of  the  existence  of  a  corporation  de  facto, 
it  is  most  amply  established.  That  there  was  proof  of  user  is 
manifest  from  the  evidence  which  was  received  without  objection. 

That  the  judgment  of  ouster  did  not  and  could  not  have  a 
retroactive  effect  upon  the  rights  of  the  society,  and  of  parties 


SOCIETY    PERUX    V.    CLEVELAND.  79 

who  had  dealt  with  it  during  its  de  facto  existence,  is  suggested 
by  the  opinion  of  Wright,  J.,  in  Gaff  v.  Flesher.  33  Ohio  St.  115. 

The  evidence  which  was  offered  and  exckided  would,  if  cred- 
ited, have  shown  Society  Perun  capable  of  holding  and  transfer- 
ring the  legal  title  to  the  land  in  controversy.  Walsh  v.  Barton, 
24  Ohio  St.  43;  Darst  v.  Gale,  83  111.  136;  Shewalter  v.  Pirner, 
55  Mo.  218;  Xat.  Bank  v.  Matthews,  98  U.  S.  628;  Goundie  v. 
Northampton  Water  Co.,  7  Penn.  St.  233 ;  Barrow  v.  Nashville 
Turn.  Co.,  9  Humph.  304;  Kelly  v.  People's  Trans.  Co.,  3  Ore. 
189;  Bogardus  v.  Trinity  Church,  4  Sandf.  Ch.  758. 

The  public  and  all  persons  dealing  with  this  society  were  justi- 
fied in  assuming  that  the  certificate  filed  with  the  secretary  of 
state,  and  by  him  admitted  to  record  in  his  office,  had  been  ap- 
proved by  him,  and  also  by  the  attorney-general,  as  required  by 
statute  (69  Ohio  L.  150),  and  that  it  so  far  conformed  to  all 
legal  requirements  that,  as  provided  in  section  2  of  the  act  of 
incorporation  (69  Ohio  L.  83),  "a  copy,  duly  certified  by  the  sec- 
retary of  state,  under  the  great  seal  of  the  state  of  Ohio,  shall  be 
evidence  of  the  existence  of  such  association." 

It  would  seem  that  such  approval,  record,  and  certificate,  fol- 
lowed by  uninterrupted  and  unchallenged  user,  for  nearly  six 
years,  of  all  of  which  proof  was  tendered,  would  constitute  a  cor- 
poration de  facto,  if  such  a  body  is,  under  any  circumstances, 
entitled  to   legal   recognition. 

The  highest  considerations  of  public  policy  and  fair  dealing 
protest  against  treating  such  an  organization  as  a  nullity,  and  all 
of  its  transactions   void. 

The  principle  of  the  above  cases  is  to  be  distinguished  from  a 
case  where  a  mere  corporation  de  facto  attempts  to  assert  the 
power  of  eminent  domain  by  the  appropriation  of  private  prop- 
erty to  public  use.  It  has  been  held  that  the  exercise  of  this  right 
(which  is  but  a  delegation  of  the  sovereign  power  of  the  state), 
depends  upon  the  sufficiency  and  legal  validity  of  the  certificate 
of  incorporation  and  public  record  of  its  organization.  R.  R.  Co. 
V.  Sullivant,  5  Ohio  St.  276;  Atkinson  v.  R.  R.  Co.,  15  Ohio 
St.  21. 

The  case  of  Raccoon  River  Nav.  Co.  v.  Eagle,  29  Ohio  St. 
238,  is  relied  upon  by  the  defendant  in  error.  It  was  an  action 
to  recover  upon  a  stock  subscription.  A  plea  of  nul  tiel  corpora- 
tion was  interposed.  The  plaintiff  claimed  to  be  organized  under 
an  act  to  authorize  the  incorporation  of  companies  '*'for  the  pur- 
pose of  improving  any  stream  of  water  *  *  *  declared  navi- 
gable by  any  law  of  the  state  of  Ohio."  On  the  trial  the  plain- 
tiff offered  in  evidence  a  certificate  by  which  it  appeared  that  the 
company  was  formed  for  the  purpose  of  improving,  etc..  Big 
Raccoon  river.  Unfortunately  there  was  no  navigable  stream  in 
Ohio  by  that  name.  No  other  testimony  was  offered.  There  was 
no  proof  of  user.  There  was  no  defect  in  the  form  of  the  pro- 
ceedings  to   incorporate,   but   an   attempt   to   organize   and   incor- 


80  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

porate  for  a  purpose  impossible  of  accomplishment.  There  was 
neither  a  de  jure  nor  de  facto  corporation.  Judgment  was  prop- 
erly rendered   for  defendant. 

In  excluding  proof  of  what  was  actually  done  looking  to  the 
incorporation  of  Society  Perun,  and  of  the  subsequent  acts  of 
user,  which  was  offered  in  evidence,  there  was  error,  for  which 
the  judgment  in  the  first  entitled  case  (as  well  as  that  in  the  same 
plaintiff  against  Hay  et  al.,  which  was  tried  with  it  and  involves 
the  same  general  questions)  is  reversed.  Numerous  other  ques- 
tions are  presented  by  the  voluminous  records  in  these  cases,  but 
as  they  all  depend  upon  the  one  central  and  controlling  question 
discussed  above,  and  as  the  disposition  here  made  of  the  cases 
must  lead  to  a  re-trial  in  the  light  of  the  principles  indicated  in 
this   opinion,   they  are  not  separately  considered. 

Judgment  reversed. 


Section  2. — Estoppel  to  Deny  Corporate  Existence. 

FOSTER  V.  MOULTON. 

1886.     35  Minn.  458,  29  N.  W.  155. 

Estoppel  Between  Stockholders  Inter  se. 


X 


BERRY,  J. :  The  complaint  in  this  action  sets  out  what  pur- 
port to  be  the  articles  of  incorporation  of  a  mutual  benefit  asso- 
ciation, which  appears  to  have  been  intended  to  be  a  sort  of 
mutual  insurance  company,  and  alleges  that  said  articles  were 
duly  executed  by  defendants,  and  duly  recorded  with  the  register 
of  deeds  and  secretary  of  state;  that  one  McCarty  became  a 
member  of  the  association,  paid  his  dues  and  received  a  certificate 
of  membership;  that  he  sustained  bodily  injury  entitling  him,  as 
such  member,  to  pecuniary  benefit;  that  the  amount  due  him 
under  the  terms  of  his  membership  has  not  been  paid;  and  that 
he  has  duly  assigned  his  right  to  such  benefit  to  the  plaintiff. 

The  association  did  not  comply  with  the  statute  so  as  to  be- 
come an  insurance  corporation  de  jure.  The  appellant  (one  of 
the  defendants)  contends  that  it  was  duly  incorporated  as  a 
benevolent  society  under  Gen.  St.  1878,  c.  34,  title  3.  This  can- 
not be  so,  for  it  is  no  more  a  benevolent  society  than  any  mutual 
insurance  company,  or  other  mutual  company,  or  any  partnership 
of  which  one  member  undertakes  to  do  something  for  the  pecuni- 
ary advantage  of  another  member,  in  consideration  of  the  under- 
taking of  the  latter  to  do  a  like  thing  for  him.  The  undertaking 
is  not  in  a  proper  sense  benevolent,  but  it  is  for  a  quid  pro  quo; 
it  is  paid  for.  People  v.  Nelson,  46  N.  Y.  477.  The  association 
involved  in  the  case  at  bar  is,  in  substance,  for  purposes  of  mu- 
tual insurance.     State  v.   Merchants'   Exch.   Mut.   Ben.   Soc,   72 


FOSTER    V.    MOULTON.  Bl 

Mo.  146;  State  v.  Benefit  Ass'n,  6  Mo.  App.  163;  Com.  v. 
Wetherbee,   105  Mass.  149;  May,  Ins.  §  550a. 

But  notwithstanding  it  is  not  a  corporation  de  jure,  we  think 
it  must,  at  least,  as  between  its  members,  be  regarded  as  a  cor- 
poration de  facto.  It  is  manifest  that  the  understanding  between 
the  members,  and  the  basis  upon  which  certificates  of  member- 
ship were  issued,  was  that  the  association  was  a  corporation  in 
fact  as  it  was  in  form.  Morawetz,  Priv.  Corp.  §  139.  It  never 
could  have  been  intended  or  expected  that  the  members  of  the  as- 
sociation, whether  original  founders — members  like  defendants — 
or  those  who  should  become  members  by  joining  at  any  time, 
should  or  would  be  liable  as  individuals,  either  jointly  or  sever- 
ally, to  any  particular  member  who  should,  by  virtue  of  and 
under  the  terms  of  his  membership,  become  entitled  to  pecuniary 
relief  or  benefit.  On  the  contrary,  the  intention  and  the  real  con- 
^  tract  was  that  the  association,  as  a  corporation  in  the  contempla- 
tion of  the  parties,  i.  e.,  the  members,  should  be  liable,  and  the 
association  only.  In  such  a  state  of  facts,  though  the  association 
is  not  a  corporation  de  jure,  and  perhaps  not  for  every  purpose 
a  corporation  de  facto,  it  is,  as  between  the  members  themselves, 
to  be  treated  as  a  corporation  de  facto  (for  that  is  the  way  in 
which  the  contract  of  the  parties  treats  it)  ;  and  the  right  of  a 
member  to  pecuniary  benefit  from  the  association  by  virtue  of  his 
membership  must  stand  upon  the  basis  that  it  is  a  corporation  de 
facto.  Being  presumed  to  know  the  significance  of  his  member- 
ship, its  rights  and_  liabilities   (Coles  v.  Iowa  State  ]\Iut.  Ins.  Co., 

18  Iowa,  425),  he  is  estopped  to  take  any  other  position.  This  is 
not  only  intrinsically  just  and  fair,  but  it  is  in  accordance  with 
the  principles  of  the  authorities.  Morawetz,  Priv.  Corp.  §§  131, 
132,  134-137;  Bufifalo  &  A.  R.  Co.  v.  Cary,  26  N.  Y.  75,  fol- 
lowed in  57.  64.  67,  N.  Y.,  and  95  U.  S. ;  White  v.  Ross,  4  Abb. 
Dec.  589;  Aspinwall  v.  Sacchi,  57  N.  Y.  331;  Eaton  v.  Aspinwall, 

19  N.  Y.  119;  Sands  v.  Hill,  46  Barb.  651;  Sanger  v.  Upton,  91 
U.  S.  56;  Chubb  V.  Upton,  95  U.   S.  665. 

It  is  important  to  bear  in  mind  that  no  fraud  is  alleged  against 
defendant;  and,  further,  that  this  is  a  case  in  which  a  member 
of  the  association  is  seeking  relief  by  virtue  of  his  membership. 
If  the  action  were  between  a  purported  or  pretended  corporation, 
which  was  wholly  unauthorized  and  invalid,  and  a  stranger,  dif- 
ferent rules  and  principles  might,  in  some  circumstances,  be  in- 
volved. 

The  application  of  the  foregoing  views  is  that,  the  action  hav- 
ing been  brought  against  defendants  as  individuals  merelv,  the 
general  demurrer  of  the  appellant,  who  w^as  one  of  the  defendant 
members  of  the  association,  was  erroneously  overruled.  The 
overruling  order  is  accordingly  reversed.^ 

'See  al?o,  Bushnell  v.    Consolidated   Ice   Machine   Co.,   138  III.  67.   27 
N.  E.  596.— Ed. 

6 — Private  Corp. 


82  CORPORATIONS    EXISTING    WITHOUT    LEGAL    RIGHT. 

JONES  V.   CINCINNATI   TYPE   FOUNDRY   CO. 

i860.      14   Ind.   89. 
Recognition   as  a   Corporation — Dealing   on   Corporate  Basis. 

PERKINS,  J. — Suit  upon  a  promissory  note. 

"The  Cincinnati  Type  Foundry  Company,  a  corporation,"  etc., 
"complains  of  David  W.  Jones,  defendant,"  etc.,  upon  a  promis- 
sory note,  of  which  a  copy  is  set  out  thus: 

"$279.  IndianapoHs,   Indiana,  October   11,   1857. 

"Six  months  after  date,  I  promise  to  pay  to  the  order  of  the 
Cincinnati  Type  Foundry  Company,  two  hundred  and  seventy- 
nine  dollars,  for  value  received,  without  relief  from  valuation 
laws.  David   W.   Jones." 

The  defendant  demurred  to  the  complaint.  The  demurrer  was 
overruled,  and   rightly. 

The  defendant  then  answered — 

1.  That  he  was  not  indebted  to  the  plaintiffs. 

2.  That  each  and  every  allegation  of  the  complaint  was  untrue. 

3.  That  the  plaintiffs  had  not  a  legal  capacity  to  sue,  because 
not  a  corporation. 

Issue.  Trial.  The  note  constituted  all  the  evidence.  Judgment 
for  the  plaintiffs  on  the  note. 

The  appellant  contends  that  the  case  was  not  made  out  against 
him,  because  it  was  not  proved  that  the  appellees  were  a  corpora- 
tion, and  thus  possessed  of  the  capacity  to  sue. 

The  appellees  insist  that  the  note  sued  on  is  a  contract  with 
them  as  a  corporation,  and  that  their  existence  is  thereby  ad- 
mitted. 

As  a  general  proposition,  it  is  the  law  of  this  state  that  a  con- 
tract with  a  party  as  a  corporation  estops  the  party  so  contracting 
to  deny  the  existence  of  the  corporation  at  the  time  it  was  con- 
tracted with  as  such.     Shappel  v.   Hubbard,  at  this  term. 

And  it  has  been  held  in  other  states  that  where  individuals  are 
incorporated  upon  performance  of  certain  acts,  a  person  who 
contracts  with  them  by  their  corporate  name,  cannot,  in  an  action 
against  him  on  the  contract,  deny  the  performance  by  them  of  the 
acts  necessary  to  give  them  a  corporate  existence.  Hamtranck 
V.  The  Bank  of  Edwardsville,  2  Miss.  R.  169. — Tarr  River  Navi- 
gation Co.  V.  Neal,  3  Hawks,  520.     See  i  U.  S.  Dig.  593 ;  4  id. 

433- 

In  New  York,  to  work  such  estoppel,  it  has  been  necessary  that 

the  contract  should  state  that  the  party  contracted  with  was  a 
corporation.  But  this  rule  does  not  prevail  in  other  states.  It 
has  not  been  acted  upon  in  this  state. 

If  the  style  by  which  a  party  is  contracted  with  is  such  as  is 
usual  in  creating  corporations,  viz.,  naming  an  ideality,  but  dis- 
closing that  of  no  individual,  as  is  usual  in  the  cases  of  simple 


JONES   V.    CINCINNATI   TYPE    FOUNDRY    CO.  83 

partnerships,  it  has  been  treated  as  prima  facie,  at  least,  indicat- 
ing a  corporate  existence.  And  such  seems  to  have  been  the  rule 
at  common  law.  Grant  on  Corp.,  62.  Probably,  a  special  answer, 
in  such  cases,  in  the  nature  of  a  plea  in  abatement,  might,  at  the 
proper  time,  be  made  available.  See  Ang.  and  Ames  on  Corp., 
506,  507,  and  the  numerous  cases  in  our  own  Reports. 

And  there  is  no  hardship  in  this.  The  party  executing  the  note 
owes  the  amount  of  it.  The  judgment  upon  it  in  the  suit  merges 
it,  and  the  payment  of  the  judgment  satisfies  it,  and  bars  any 
other  action  against  the  maker  for  the  money. 

But,  in  this  class  of  cases,  it  would  seem,  after  all,  that  the 
Courts  have  proceeded  upon  a  rule  of  evidence,  rather  than  the 
strict  doctrine  of  estoppel.  They  have  treated  the  contract  with  a 
party  by  a  name  implying  a  corporation,  really  as  evidence  of  the 
existence  of  a  corporation,  more  than  as  an  estoppel  to  disprove 
such  fact.  Grant,  in  his  late  learned  work  on  Corporations,  says : 
''Generally,  the  fact  of  an  aggregate  body  being  called  by  a  name, 
is,  prima  facie,  evidence  that  they  are  incorporated,  'for  the  name 
argues  a  corporation.'  Norris  v.  Staps,  Hobart,  11.  But  the 
courts  take  judicial  notice  that  'A.  B.  and  company'  is  not  the 
name  of  a  corporation.     Rex  v.  Harrison,  8  T.  R.  508." 

The  doctrine  of  conclusive  estoppel  seems  more  properly  ap- 
plied to  cases  involving  the  question  of  legality  of  organization, 
where  the  fact  of  an  existing  statute,  authorizing,  in  the  given 
case,  such  corporation,  is  known  to  the  court,  either  by  judicial 
notice  or  actual  evidence  in  the  cause. 

In  such  cases,  where  a  party  has  contracted  with  a  body  as 
being  organized  as  a  corporation  under  the  law,  he  will  be  es- 
topped to  dispute  the  legality  of  the  organization.  See  the  cases 
cited  in  the  U.  S.  Dig.,  and  Ang.  and  Ames,  ubi  supra.     *     *     * 

Judgment  affirmed. 


CHAPTER  V. 

THE    CORPORATION    AND    THE    STATE. 

TRUSTEES  OF  DARTMOUTH  COLLEGE  v.  WOODWARD.^ 
1819.     4  Wheat.    (U.   S.)    518,  4  L.   ed.   629. 
Poiver   of   the   Legislature   Over   Corporations. 

MARSHALL,  C.  J.:  This  is  an  action  of  trover,  brought  by 
the  trustees  of  Dartmouth  College  against  William  H.  Woodward, 
in  the  State  Court  of  New  Hampshire,  for  the  books  of  records, 
corporate  seal,  and  other  corporate  property,  to  which  the  plain- 
tiffs allege  themselves  to  be  entitled. 

A  special  verdict,  after  setting  out  the  rights  of  the  parties, 
finds  for  the  defendant,  if  certain  acts  of  the  legislature  of  New 
Hampshire,  passed  on  the  27th  of  June  and  on  the  18th  of  De- 
cember, 1816,  be  valid  and  binding  on  the  trustees  without  their 
assent,  and  not  repugnant  to  the  constitution  of  the  United  States; 
otherwise,  it  finds  for  the  plaintiff's. 

The  Superior  Court  of  Judicature  of  Xew  Hampshire  rendered 
a  judgment  upon  this  verdict  for  the  defendant,  which  judgment 
has  been  brought  before  this  court  by  writ  of  error.  The  single 
question  now  to  be  considered  is,  do  the  acts  to  which  the  verdict 
refers  violate  the  constitution  of  the  United  States? 

This  court  can  be  insensible  neither  to  the  magnitude  nor  deli- 
cacy of  this  question.  The  validity  of  a  legislative  act  is  to  be 
examined,  and  the  opinion  of  the  highest  law  tribunal  of  a  state 
is  to  be  revised ;  an  opinion  which  carries  with  it  intrinsic  evi- 
dence of  the  diligence,  of  the  ability  and  the  integrity  with  which 
it  was  formed.  On  more  than  one  occasion  this  court  has  ex- 
pressed the  cautious  circumspection  with  which  it  approaches  the 
consideration  of  such  questions,  and  has  declared  that  in  no 
doubtful  case  would  it  pronounce  a  legislative  act  to  be  contrary 
to  the  constitution.  But  the  American  people  have  said,  in  the 
constitution  of  the  United   States,  that  "no  state  shall  pass  any 

^As  to  the  legislative  control  over  corporations,  see  also  Charles 
River  Bridge  Co.  v.  Warren.  11  Pet.  (U.  S.)  420  (1837);  Thorpe  v. 
Railroad  Co.,  27  Vt.  140  (1855);  Greenwood  v.  Freight  Co.,  105  U.  S. 
13  (1881);  Commonwealth  v.  Eastern  R.  Co.,  103  Mass.  254  (1869); 
Railway  (To.  v.  Lackey,  78  111.  55  (1875);  Commonwealth  v.  Essex  Co., 
13  Gray.  (Mass.)  239  (1859);  Detroit  v.  Plank  Road  Co.,  43  Mich.  140 
(1880). 

As  to  the  circumstances  leading  up  to  the  Dartmouth  College  Case, 
see  Lodge's  Life  of  Daniel  Webster  (American  Statesmen  Series), 
Chap.  III.— Ed. 


TRUSTEES  OF  DARTMOUTH  COLLEGE  V.  WOODWARD.       85 

bill  of  attainder,  ex  post  facto  law,  or  law  impairing  the  obliga- 
tion of  contracts."  In  the  same  instrument  they  have  also  said 
"that  the  judicial  power  shall  extend  to  all  cases  in  law  and 
equity  arising  under  the  constitution."  On  the  judges  of  this 
court,  then,  is  imposed  the  high  and  solemn  duty  of  protecting, 
from  even  legislative  violation,  those  contracts  which  the  consti- 
tution of  our  country  has  placed  beyond  legislative  control,  and, 
however  irksome  the  task  may  be,  this  is  a  duty  from  which  we 
dare   not   shrink. 

The  title  of  the  plaintiffs  originates  in  a  charter  dated  the  13th 
day  of  December,  in  the  year  1769,  incorporating  twelve  persons 
therein  mentioned,  by  the  name  of  "The  Trustees  of  Dartmouth 
College,"  granting  to  them  and  their  successors  the  usual  corpo- 
rate privileges  and  powers,  and  authorizing  the  trustees,  who  are 
to  govern  the  college,  to  fill  up  all  vacancies  which  may  be  cre- 
ated in  their  own  body. 

The  defendant  claims  under  three  acts  of  the  legislature  of  New 
Hampshire,  the  most  material  of  which  was  passed  on  the  27th 
of  June,  1816,  and  is  entitled  "An  act  to  amend  the  charter,  and 
enlarge  and  improve  the  corporation  of  Dartmouth  College." 
Among  other  alterations  in  the  charter,  this  act  increases  the 
number  of  trustees  to  twenty-one,  gives  the  appointment  of  the 
additional  members  to  the  executive  of  the  state,  and  creates  a 
board  of  overseers,  with  power  to  inspect  and  control  the  most 
important  acts  of  the  trustees.  This  board  consists  of  twenty-five 
persons.  The  president  of  the  senate,  the  speaker  of  the  house  of 
representatives,  of  New  Hampshire,  and  the  governor  and  lieu- 
tenant-governor of  Vermont,  for  the  time  being,  are  to  be  mem- 
bers ex-officio.  The  board  is  to  be  completed  by  the  governor  and 
council  of  New  Hampshire,  who  are  also  empowered  to  fill  all 
vacancies  which  may  occur.  The  acts  of  the  i8th  and  26th  of 
December  are  supplemental  to  that  of  the  27th  of  June,  and  are 
principally  intended  to  carry  that  act  into  effect. 

The  majority  of  the  trustees  of  the  college  have  refused  to  ac- 
cept this  amended  charter,  and  have  brought  this  suit  for  the 
corporate  property,  which  is  in  possession  of  a  person  holding 
by  virtue  of  the  acts  which  have  been  stated. 

It  can  require  no  argument  to  prove  that  the  circumstances  of 
this  case  constitute  a  contract.  An  application  is  made  to  the 
crown  for  a  charter  to  incorporate  a  religious  and  literary  insti- 
tution. In  the  application  it  is  stated  that  large  contributions 
have  been  made  for  the  object,  which  will  be  conferred  on  the 
corporation  as  soon  as  it  shall  be  created.  The  charter  is  granted, 
and  on  its  faith  the  property  is  conveyed.  Surely  in  this  trans- 
action every  ingredient  of  a  complete  and  legitimate  contract  is 
to  be  found. 

The   points    for   consideration    are: 

I.  Is  this  contract  protected  by  the  constitution  of  the  United 
States  ? 


86  THE   CORPORATION   AND  THE   STATE. 

2.     Is  it  impaired  by  the  acts  under  which  the  defendant  holds? 

I.  On  the  first  point  it  has  been  argued  that  the  word  "con- 
tract." in  its  broadest  sense,  would  comprehend  the  political  rela- 
tions between  the  government  and  its  citizens,  would  extend  to 
offices  held  within  a  state  for  state  purposes,  and  to  many  of 
those  laws  concerning  civil  institutions  which  must  change  with 
circumstances  and  be  modified  by  ordinary  legislation;  which 
deeply  concern  the  public,  and  which,  to  preserve  good  govern- 
ment, the  public  judgment  must  control;  that  even  marriage_  is 
a  contract,  and  its  obligations  are  affected  by  the  laws  respecting 
divorces;  that  the  clause  in  the  constitution,  if  construed  in  its 
greatest  latitude,  would  prohibit  these  laws.  Taken  in  its  broad, 
unlimited  sense,  the  clause  would  be  an  unprotfiable  and  vexatious 
interference  with  the  internal  concerns  of  a  state,  would  unnec- 
essarily and  unwisely  embarrass  its  legislation,  and  render  im- 
mutable those  civil  institutions  which  are  established  for  purposes 
of  internal  government,  and  which,  to  subserve  those  purposes, 
ought  to  vary  with  varying  circumstances.  That  as  the  framers 
of  the  constitution  could  never  have  intended  to  insert  in  that 
instrument  a  provision  so  unnecessary,  so  mischievous,  and  so  re- 
pugnant to  its  general  spirit,  the  term  "contract"  must  be  under- 
stood in  a  more  limited  sense.  That  it  must  be  understood  as 
intended  to  guard  against  a  power  of  at  least  doubtful  utility, 
the  abuse  of  which  had  been  extensively  felt,  and  to  restrain  the 
legislature  in  future  from  violating  the  right  to  property.  That 
anterior  to  the  formation  of  the  constitution  a  course  of  legisla- 
tion had  prevailed  in  many,  if  not  in  all,  of  the  states,  which 
weakened  the  confidence  of  man  in  man  and  embarrassed  all 
transactions  between  individuals  by  dispensing  with  a  faithful 
performance  of  engagements.  To  correct  this  mischief,  by  re- 
straining the  power  which  produced  it.  the  state  legislatures  were 
forbidden  "to  pass  any  law  impairing  the  obligation  of  contracts," 
that  is,  of  contracts  respecting  property,  under  which  some  indi- 
vidual could  claim  a  right  to  something  beneficial  to  himself;  and 
that,  since  the  clause  in  the  constitution  must  in  construction 
receive  some  limitation,  it  may  be  confined,  and  ought  to  be  con- 
fined, to  cases  of  this  description;  to  cases  within  the  mischief 
it  was  intended  to  remedy. 

The  general  correctness  of  these  observations  cannot  be  contro- 
verted. That  the  framers  of  the  constitution  did  not  intend  to 
restrain  the  states  in  the  regulation  of  their  civil  institutions, 
adopted  for  internal  government,  and  that  the  instrument  they 
have  given  us  is  not  to  be  so  construed,  may  be  admitted.  The 
provision  of  the  constitution  never  has  been  understood  to  em- 
brace other  contracts  than  those  which  respect  property,  or  some 
object  of  value,  and  confer  rights  which  may  be  asserted  in  a 
court  of  justice.  It  never  has  been  understood  to  restrict  the 
general  right  of  the  legislature  to  legislate  on  the  subject  of  di- 
vorces.    Those  acts  enable  some  tribunals,  not  to  impair  a  mar- 


TRUSTEKS  OF  DARTMOUTH  COLLEGE  V.  WOODWARD.       8/ 

riage  contract,  but  to  liberate  one  of  the  parties  because  it  has 
been  broken  by  the  other.  When  any  state  legislature  shall  pass 
an  act  annulling  all  marriage  contracts,  or  allowing  either  party 
to  annul  it  without  the  consent  of  the  other,  it  will  be  time 
enough  to  inquire  whether  such  an  act  be  constitutional. 

The  parties  in  this  case  dififer  less  on  general  principles,  less  on 
the  true  construction  of  the  constitution  in  the  abstract,  than  on 
the  application  of  those  principles  to  this  case,  and  on  the  true 
construction  of  the  charter  of  1769.  This  is  the  point  on  which 
the  cause  essentially  depends.  If  the  act  of  incorporation  be  a 
grant  of  political  power,  if  it  create  a  civil  institution  to  be  em- 
ployed in  the  administration  of  the  government,  or  if  the  funds  of 
the  college  be  public  property,  or  if  the  state  of  New  Hampshire, 
as  a  government,  be  alone  interested  in  its  transactions,  the  sub- 
ject is  one  in  which  the  legislature  of  the  state  may  act  according 
to  its  own  judgment,  unrestrained  by  any  limitation  of  its  power 
imposed  by  the  constitution  of  the  United  States. 

But  if  this  be  a  private  eleemosynary  institution,  endowed  with 
a  capacity  to  take  property  for  objects  unconnected  with  govern- 
ment, whose  funds  are  bestowed  by  individuals  on  the  faith  of  the 
charter;  if  the  donors  have  stipulated  for  the  future  disposition 
and  management  of  those  funds  in  the  manner  prescribed  by 
themselves,  there  may  be  more  difficulty  in  the  case,  although 
neither  the  persons  who  have  made  these  stipulations  nor  those 
for  whose  benefit  they  were  made  should  be  parties  to  the  cause. 
Those  who  are  no  longer  interested  in  the  property  may  yet  re- 
tain such  an  interest  in  the  preservation  of  their  own  arrange- 
ments as  to  have  a  right  to  insist  that  those  arrangements  shall 
be  held  sacred.  Or,  if  they  have  themselves  disappeared,  it  be- 
comes a  subject  of  serious  and  anxious  inquiry  whether  those 
whom  they  have  legally  empowered  to  represent  them  forever 
may  not  assert  all  the  rights  which  they  possessed  while  in  being, 
whether,  if  they  be  without  personal  representatives  who  may 
feel  injured  by  a  violation  of  the  compact,  the  trustees  be  not  so 
completely  their  representatives,  in  the  eye  of  the  law.  as  to  stand 
in  their  place,  not  only  as  respects  the  government  of  the  college, 
but  also  as  respects  the  maintenance  of  the  college  charter. 

It  becomes,  then,  the  duty  of  the  court  most  seriously  to  exam- 
ine this  charter,  and  to  ascertain  its  true  character. 

From  the  instrument  itself  it  appears  that  about  the  year  1754 
the  Rev.  Eleazar  Wheelock  established,  at  his  own  expense  and  on 
his  own  estate,  a  charity  school  for  the  instruction  of  Indians  in 
the  Christian  religion.  The  success  of  this  institution  inspired 
him  with  the  design  of  soliciting  contributions  in  England  for 
carrying  on  and  extending  his  undertaking.  In  this  pious  work 
he  employed  the  Rev.  Nathaniel  Whitaker,  who,  by  virtue  of  a 
power  of  attorney  from  Dr.  Wheelock.  appointed  the  Earl  of 
Dartmouth  and  others  trustees  of  the  money  which  had  been,  and 
should    be.    contributed,    which    appointment    Dr.    Wheelock    con- 


88  THE  CORPORATION   AND  THE  STATE. 

firmed  by  a  deed  of  trust  authorizing  the  trustees  to  fix  on  a  site 
for  the  college.  They  determined  to  establish  the  school  on  Con- 
necticut river,  in  the  western  part  of  New  Hampshire,  that  situa- 
tion being  supposed  favorable  for  carrying  on  the  original  design 
among  the  Indians,  and  also  for  promoting  learning  among  the 
English ;  and  the  proprietors  in  the  neighborhood  having  made 
large  offers  of  land  on  condition  that  the  college  should  there  be 
placed.  Dr.  Wheelock  then  applied  to  the  crown  for  an  act  of 
incorporation,  and  represented  the  expediency  of  appointing  those 
whom  he  had,  by  his  last  will,  named  as  trustees  in  America,  to 
be  members  of  the  proposed  corporation.  "In  consideration  of 
the  premises,"  "for  the  education  and  instruction  of  the  youth 
of  the  Indian  tribes,"  etc.,  "and  also  of  English  youth  and  any 
others,"  the  charter  was  granted,  and  the  trustees  of  Dartmouth 
college  were  by  that  name  created  a  body  corporate,  with  power, 
for  the  use  of  the  said  college,  to  acquire  real  and  personal  prop- 
erty, and  to  pay  the  president,  tutors  and  other  officers  of  the 
college  such  salaries  as  they  shall  allow. 

The  charter  proceeds  to  appoint  Eleazer  Wheelock,  "the  founder 
of  said  college,"  president  thereof,  with  power  by  his  last  will  to 
appoint  a  successor,  who  is  to  continue  in  office  until  disapproved 
by  the  trustees.  In  case  of  vacancy  the  trustees  may  appoint  a 
president,  and  in  case  of  the  ceasing  of  a  president  the  senior  pro- 
fessor or  tutor,  being  one  of  the  trustees,  shall  exercise  the  office 
until  an  appointment  shall  be  made.  The  trustees  have  power  to 
appoint  and  displace  professors,  tutors,  and  other  oflficers,  and  to 
supply  any  vacancies  which  may  be  created  in  their  own  body  by 
death,  resignation,  removal,  or  disability ;  and  also  to  make  or- 
ders, ordinances  and  laws  for  the  government  of  the  college,  the 
same  not  being  repugnant  to  the  laws  of  Great  Britain  or  of  New 
Hampshire,  and  not  excluding  any  person  on  account  of  his  spec- 
ulative sentiments  in  religion,  or  his  being  of  a  religious  profes- 
sion different  from  that  of  the  trustees. 

This  charter  was  accepted,  and  the  property,  both  real  and  per- 
sonal, which  had  been  contributed  for  the  benefit  of  the  college, 
was  conveyed  to,  and  vested  in,  the  corporate  body. 

From  this  brief  review  of  the  most  essential  parts  of  the  charter 
it  is  apparent  that  the  funds  of  the  college  consisted  entirely  of 
private  donations.  It  is,  perhaps,  not  very  important  who  were 
the  donors.  The  probability  is  that  the  Earl  of  Dartmouth  and 
the  other  trustees  in  England  were,  in  fact,  the  largest  contribu- 
tors. Yet  the  legal  conclusion  from  the  facts  recited  in  the 
charter  would  probably  be  that  Dr.  Wheelock  was  the  founder  of 
the  college. 

The  origin  of  the  institution  was,  undoubtedly,  the  Indian  char- 
ity school  established  by  Dr.  Wheelock,  at  his  own  expense.  It 
was  at  his  instance,  and  to  enlarge  this  school,  that  contributions 
were  solicited  in  England.  The  person  soliciting  these  contribu- 
tions was  his  agent,  and  the  trustees,  who  received  the  money, 


TRUSTEES   OF  DARTMOUTH   COLLEGE  V.    WOODWARD.  89 

were  appointed  by,  and  act  under,  his  authority.  It  is  not  too 
much  to  say  that  the  funds  were  obtained  by  him,  in  trust,  to  be 
appHed  by  him  to  the  purposes  of  his  enlarged  school.  The  char- 
ter of  incorporation  was  granted  at  his  instance.  The  persons 
named  by  him  in  his  last  will,  as  the  trustees  of  his  charity  school, 
compose  a  part  of  the  corporation,  and  he  is  declared  to  be  the 
founder  of  the  college,  and  its  president  for  life.  Were  the  in- 
quiry material,  we  should  feel  some  hesitation  in  saying  that  Dr. 
Wheelock  was  not,  in  law,  to  be  considered  as  the  founder  (i  Bl. 
Com.  481)  of  this  institution,  and  as  possessing  all  the  rights  ap- 
pertaining to  that  character.  But  be  this  as  it  may,  Dartmouth 
College  is  really  endowed  by  private  individuals,  who  have  be- 
stowed their  funds  for  the  propagation  of  the  Christian  religion 
among  the  Indians,  and  for  the  promotion  of  piety  and  learning 
generally.  From  these  funds  the  salaries  of  the  tutors  are  drawn, 
and  these  salaries  lessen  the  expense  of  education  to  the  students. 
It  is,  then,  an  eleemosynary  (i  Bl.  Com.  471),  and,  so  far  as 
respects  its   funds,  a  private  corporation. 

Do  its  objects  stamp  on  it  a  different  character?  Are  the  trus- 
tees and  professors  public  officers,  invested  with  any  portion  of 
political  power,  partaking  in  any  degree  in  the  administration  of 
civil  government,  and  performing  duties  which  flow  from  the  sov- 
ereign authority? 

That  education  is  an  object  of  national  concern,  and  a  proper 
subject  of  legislation,  all  admit.  That  there  may  be  an  institu- 
tion founded  by  government,  and  placed  entirely  under  its  imme- 
diate control,  the  officers  of  which  would  be  public  officers,  amen- 
able exclusively  to  government,  none  will  deny.  But  is  Dartmouth 
College  such  an  institution?  Is  education  altogether  in  the  hands 
of  government?  Does  every  teacher  of  youth  become  a  public 
officer,  and  do  donations  for  the  purpose  of  education  necessarily 
become  public  property,  so  far  that  the  will  of  the  legislature,  not 
the  will  of  the  donor,  becomes  the  law  of  the  donation?  These 
questions  are  of  serious  moment  to  society,  and  deserve  to  be  well 
considered. 

Dr.  Wheelock,  as  the  keeper  of  his  charity  school,  instructing 
the  Indians  in  the  art  of  reading,  and  in  our  holy  religion,  sustain- 
ing them  at  his  own  expense,  and  on  the  voluntary  contributions 
of  the  charitable,  could  scarcely  be  considered  as  a  public  officer, 
exercising  any  portion  of  those  duties  which  belong  to  govern- 
ment ;  nor  could  the  legislature  have  supposed  that  his  private 
funds,  or  those  given  by  others,  were  subject  to  legislative  man- 
agement, because  they  were  applied  to  the  purposes  of  education. 
When,  afterwards,  his  school  was  enlarged,  and  the  liberal  con- 
tributions made  in  England  and  in  America  enabled  him  to  extend 
his  cares  to  the  education  of  the  youth  of  his  own  country,  no 
change  was  wrought  in  his  own  character  or  in  the  nature  of  his 
duties.  Had  he  employed  assistant  tutors  with  the  funds  con- 
tributed by  others,  or  had  the  trustees  in  England  established  a 


90 


THE  CORPORATION   AND  THE   STATE. 


school  with  Dr.  Wheelock  at  its  head,  and  paid  salaries  to  him 
and  his  assistants,  they  would  still  have  been  private  tutors,  and 
the  fact  that  they  were  employed  in  the  education  of  youth  could 
not  have  converted  them  into  public  officers,  concerned  in  the 
administration  of  public  duties,  or  have  given  the  legislature  a 
right  to  interfere  in  the  management  of  the  fund.  The  trustees, 
in  whose  care  that  fund  was  placed  by  the  contributors,  would 
have  been  permitted  to  execute  their  trust  uncontrolled  by  legis- 
lative authority. 

Whence,  then,  can  be  derived  the  idea  that  Dartmouth  College 
has  become  a  public  institution,  and  its  trustees  public  officers, 
exercising  powers  conferred  by  the  public  for  public  objects? 
Not  from  the  source  whence  its  funds  were  drawn,  for  its  foun- 
dation is  purely  private  and  eleemosynary.  Not  from  the  appli- 
cation of  those  funds,  for  money  may  be  given  for  education,  and 
the  persons  receiving  it  do  not,  by  being  employed  in  the  educa- 
tion of  youth,  become  members  of  the  civil  government.  Is  it 
from  the  act  of  incorporation?     Let  this  subject  be  considered. 

A  corporation  is  an  artificial  being,  invisible,  intangible,  and  ex- 
isting only  in  contemplation  of  law.     Being  the  mere  creature  of 
law,  it  possesses  only  those  properties  which  the  charter  of  its 
creation  confers  upon  it,  cithers  expressly  or  as  incidental  to  its 
very  existence.    These  are  such  as  are  supposed  best  calculated  to 
efifect  the  object  for  which  it  was  created.     Among  the  most  im- 
portant are  immortality,  and,  if  the  expression  may  be  allowed, 
individuality;  properties  by  which  a  perpetual  succession  of  rnany 
persons  are  considered  as  the  same,  and  may  act  as  a  single  indi- 
vidual.    They   enable   a   corporation   to   manage   its   own   affairs, 
and  to  hold  property  without  the  perplexing  intricacies,  the  haz- 
ardous  and   endless   necessity,   of  perpetual   conveyances    for   the 
purpose  of  transmitting  it  from  hand  to  hand.     It  is  chiefly  for 
the  purpose  of  clothing  bodies  of  men,  in  succession,  with  these 
qualities  and  capacities  that  corporations  were  invented,  and  are 
in  use.     By  these  means  a  perpetual  succession  of  individuals  are 
capable  of  acting  for  the  promotion  of  the  particular  object,  like 
one  immortal  being.     But  this  being  does  not  share  in  the  civil 
government  of  the  country,  unless  that  be  the  purpose  for  which 
it  was  created.     Its  immortality  no  more  confers  on  it  political 
power,   or   a   political   character,    than   immortality   would   confer 
such  power  or  character  on  a  natural  person.     It  is  no  more  a 
state  instrument  than  a  natural  person  exercising  thesame  powers 
would  be.     If,  then,  a  natural  person,  employed  by  individuals  in 
the  education  of  youth,  or  for  the  government  of^  a  -seminary  in 
which  youth  is  educated,  would  not  become  a  public  officer,^  or  be 
considered  as  a  member  of  the  civil  government,  how  is  it  that 
this  artificial  being,  created  by  law  for  the  purpose  of  being  em- 
ployed by  the  same  individuals  for  the  same  purposes,  should  be- 
come a  part  of  the  civil  government  of  the  country?    Is  it  because 
its  existence,  its  capacities,  its  powers,  are  given  by  law?    Because 


TRUSTEES   OF   DARTMOUTH    COLLECE   V.    WOODWARD.  91 

the  government  has  given  it  the  power  to  take  and  to  hold  prop- 
erty in  a  particular  form,  and  for  particular  purposes,  has  the 
government  a  consequent  right  substantially  to  change  that  form, 
or  to  vary  the  purposes  to  which  the  property  is  to  be  applied? 
This  principle  has  never  been  asserted  or  recognized,  and  is  sup- 
ported by  no  authority.     Can  it  derive  aid  from  reason? 

The  objects  for  which  a  corporation  is  created  are  universally 
such  as  the  government  wishes  to  promote.  They  are  deemed 
beneficial  to  the  country,  and  this  benefit  constitutes  the  consid- 
eration, and.  in  most  cases,  the  sole  consideration  of  the  grant. 
In  most  eleemosynary  institutions  the  object  would  be  difficult, 
perhaps  unattainable,  without  the  aid  of  a  charter  of  incorpora- 
tion. Charitable  or  public  spirited  individuals,  desirous  of  mak- 
ing permanent^  appropriations  for  charitable  or  other  useful  pur- 
poses, find  it  impossible  to  effect  their  design  securely,  and  cer- 
tainly, without  an  incorporating  act.  They  apply  to  the  govern- 
ment, state  their  beneficient  object,  and  offer  to  advance  the 
money  necessary  for  its  accomplishment,  provided  the  government 
will  confer  on  the  instrument  which  is  to  execute  their  designs  the 
capacity  to  execute  them.  The  proposition  is  considered  and  ap- 
proved. The  benefit  to  the  public  is  considered  as  an  ample  com- 
pensation for  the  faculty  it  confers,  and  the  corporation  is  cre- 
ated. If  the  advantages  to  the  public  constitute  a  full  compensa- 
tion for  the  faculty  it  gives,  there  can  be  no  reason  for  exacting 
a  further  compensation  by  claiming  a  right  to  exercise  over  this 
artificial  being  a  power  which  changes  its  nature,  and  touches  the 
fund,  for  the  security  and  application  of  which  it  was  created. 
There  can  be  no  reason  for  implying  in  a  charter,  given  for  a 
valuable  consideration,  a  power  which  is  not  only  not  expressed, 
but  is  in  direct  contradiction  to  its  express  stipulations. 

From  the  fact,  then,  that  a  charter  of  incorporation  has  been 
granted, _  nothing  can  be  inferred  which  changes  the  character  of 
the  institution,  or  transfers  to  the  government  any  new  power 
over  it.  The  character  of  civil  institutions  does  not  grow  out  of 
their  incorporation,  but  out  of  the  manner  in  which  thev  are 
formed,  and  the  objects  for  which  they  are  created.  The  right  to 
change  them  is  not  founded  on  their' being  incorporated,  but  on 
their  being  the  instruments  of  government,  created  for  its  pur- 
poses. The  same  institutions,  created  for  the  same  objects, 
though  not  incorporated,  would  be  public  institutions,  and.  of 
course,  be  controllable  by  the  legislature.  Tlie  incorporating  act 
neither  gives  nor  prevents  this  control.  Neither,  in  reason",  can 
the  mcorporating  act  change  the  character  of  a  private  eleemosy- 
nary institution. 

We  are  next  led  to  the  inquiry,  for  whose  benefit  the  property 
given  to  Dartmouth  College  was  secured.  The  counsel  for  the 
defendant  have  insisted  that  the  beneficial  interest  is  in  the  people 
of  New  Hampshire.  The  charter,  after  reciting  the  preliminary 
measures  which  had  been  taken,  and  the  application  for  an  act  of 


92  THE  CORPORATION  AND  THE  STATE. 

incorporation,  proceeds  thus :  "Know  ye,  therefore,  that  we,  con- 
sidering the  premises,  and  being  willing  to  encourage  the  laudable 
and  charitable  design  of  spreading  Christian  knowledge  among 
the  savages  of  our  American  wilderness,  and,  also,  that  the  best 
means  of  education  be  established,  in  our  province  of  New  Hamp- 
shire, for  the  benefit  of  said  province,  do,  of  our  special  grace," 
etc.  Do  these  expressions  bestow  on  New  Hampshire  any  exclu- 
sive right  to  the  property  of  the  college,  any  exclusive  interest  in 
the  labors  of  the  professors?  Or  do  they  merely  indicate  a  wil- 
lingness that  New  Hampshire  should  enjoy  those  advantages 
which  result  to  all  from  the  establishment  of  a  seminary  of  learn- 
ing in  the  neighborhood?  On  this  point  we  think  it  impossible  to 
entertain  a  serious  doubt.  The  words  themselves,  unexplained 
by  the  context,  indicate  that  the  "benefit  intended  for  the  pro- 
vince" is  that  which  is  derived  from  "establishing  the  best  means 
of  education  therein;"  that  is,  from  establishing  in  the  province 
Dartmouth  College,  as  constituted  by  the  charter.  But,  if  these 
words,  considered  alone,  could  admit  of  doubt,  that  doubt  is  com- 
pletely removed  by  an  inspection  of  the  entire  instrument. 

The  particular  interests  of  New  Hampshire  never  entered  into 
the  mind  of  the  donors,  never  constituted  a  motive  for  their  do- 
nation. The  propagation  of  the  Christian  religion  among  the 
savages,  and  the  dissemination  of  useful  knowledge  among  the 
youth  of  the  country,  were  the  avowed  and  the  sole  objects  of 
their  contributions.  In  these  New  Hampshire  would  participate; 
but  nothing  particular  or  exclusive  was  intended  for  her.  Even 
the  site  of  the  college  was  selected,  not  for  the  sake  of  New 
Hampshire,  but  because  it  was  "most  subservient  to  the  great 
ends  in  view,"  and  because  liberal  donations  of  land  were  offered 
by  the  proprietors  on  condition  that  the  institution  should  be 
there  established.  The  real  advantages  from  the  location  of  the 
college  are,  perhaps,  not  less  considerable  to  those  on  the  west 
than  to  those  on  the  east  side  of  Connecticut  river.  The  clause 
which  constitutes  the  incorporation,  and  expresses  the  objects  for 
which  it  was  made,  declares  those  objects  to  be  the  instruction  of 
the  Indians,  "and  also  of  English  youth,  and  any  others."  So 
that  the  objects  of  the  contributors  and  the  incorporating  act 
were  the  same;  the  promotion  of  Christianity  and  of  education 
generally,  not  the  interests  of  New  Hampshire  particularly. 

From  this  review  of  the  charter  it  appears  that  Dartmouth 
College  is  an  eleemosynary  institution,  incorporated  for  the  pur- 
pose of  perpetuating  the  application  of  the  bounty  of  the  donors 
to  the  specified  objects  of  that  bounty;  that  its  trustees  or  gov- 
ernors were  originally  named  by  the  founder,  and  invested  with 
the  power  of  perpetuating  themselves ;  that  they  are  not  public 
officers,  nor  is  it  a  civil  institution,  participating  in  the  administra- 
tion of  government ;  but  a  charity  school,  or  a  seminary  of  educa- 
tion, incorporated  for  the  preservation  of  its  property,  and  the 
perpetual  application  of  that  property  to  the  objects  of  its  creation. 


TRUSTEES   OF  DARTMOUTH    COLLEGE   V.    WOODWARD.  93 

Yet  a  question  remains  to  be  considered,  of  more  real  difficulty, 
on  which  more  doubt  has  been  entertained  than  on  all  that  have 
been  discussed.  The  founders  of  the  college,  at  least  those  whose 
contributions  were  in  money,  have  parted  with  the  property  be- 
stowed upon  it,  and  their  representatives  have  no  interest  in  that 
property.  The  donors  of  land  are  equally  without  interest  so 
long  as  the  corporation  shall  exist.  Could  they  be  found,  they  are 
unaffected  by  any  alteration  in  its  constitution,  and  probably  re- 
gardless of  its  form,  or  even  of  its  existence.  The  students  are 
fluctuating,  and  no  individual  among  our  youth  has  a  vested  in- 
terest in  the  institution  which  can  be  asserted  in  a  court  of  jus- 
tice. Neither  the  founders  of  the  college  nor  the  youth  for  whose 
benefit  it  was  founded  complain  of  the  alteration  made  in  its 
charter,  or  think  themselves  injured  by  it.  The  trustees  alone 
complain,  and  the  trustees  have  no  beneficial  interest  to  be  pro- 
tected. Can  this  be  such  a  contract  as  the  constitution  intended 
to  withdraw  from  the  power  of  state  legislation?  Contracts,  the 
parties  to  which  have  a  vested  beneficial  interest,  and  those  only, 
it  has  been  said,  are  the  objects  about  which  the  constitution  is 
solicitious,  and  to  which  its  protection  is   extended. 

The  court  has  bestowed  on  this  argument  the  most  deliberate 
consideration,  and  the  result  will  be  stated.  Dr.  Wheelock,  acting 
for  himself,  and  for  those  who,  at  his  solicitation,  had  made  con- 
tributions to  his  school,  applied  for  this  charter,  as  the  instrument 
which  should  enable  him,  and  them,  to  perpetuate  their  beneficent 
intention.  It  was  granted.  An  artificial,  immortal  being  was 
created  by  the  crown,  capable  of  receiving  and  distributing  for- 
ever, according  to  the  will  of  the  donors,  the  donations  which 
should  be  made  to  it.  On  this  being  the  contributions  which  had 
been  collected  were  immediately  bestowed.  These  gifts  were 
made,  not,  indeed,  to  make  a  profit  for  the  donors  or  their  pos- 
terity, but  for  something  in  their  opinion  of  inestimable  value; 
for  something  which  they  deemed  a  full  equivalent  for  the  money 
with  which  it  was  purchased.  The  consideration  for  which  they 
stipulated  is  the  perpetual  application  of  the  fund  to  its  object,  in 
the  mode  prescribed  by  themselves.  Their  descendants  may  take 
no  interest  in  the  preservation  of  this  consideration.  But  in  this 
respect  their  descendants  are  not  their  representatives.  They  are 
represented  by  the  corporation.  The  corporation  is  the  assignee 
of  their  rights,  stands  in  their  place,  and  distributes  their  bounty 
as  they  would  themselves  have  distributed  it  had  they  been  im- 
mortal. So  with  respect  to  the  students  who  are  to  derive  learn- 
ing from  this  source.  The  corporation  is  a  trustee  for  them  also. 
Their  potential  rights,  which,  taken  distributively.  are  impercep- 
tible, amount  collectively  to  a  most  important  interest.  These 
are,  in  the  aggregate,  to  be  exercised,  asserted,  and  protected  by 
the  corporation.  They  were  as  completely  out  of  the  donors  at 
the  instant  of  their  being  vested  in  the  corporation,  and  as  incapa- 
ble of  being  asserted  by  the  students,   as   at  present. 


94  THE  CORPORATION   AND  THE   STATE. 

According  to  the  theory  of  the  British  constitution,  their  par- 
liament is  omnipotent.  To  annul  corporate  rights  might  give  a 
shock  to  public  opinion,  which  that  government  has  chosen  to 
avoid,  but  its  power  is  not  questioned.  Had  parliament,  imme- 
diately after  the  emanation  of  this  charter,  and  the  execution  of 
those  conveyances  which  followed  it,  annulled  the  instrument,  so 
that  the  living  donors  would  have  witnessed  the  disappointment 
of  their  hopes,  the  perfidy  of  the  transaction  would  have  been 
universally  acknowledged.  Yet  then,  as  now,  the  donors  would 
have  had  no  interest  in  the  property;  then,  as  no\y,  those  who 
might  be  students  would  have  had  no  rights  to  be  violated ;  then, 
as  now,  it  might  be  said  that  the  trustees,  in  whom  the  rights  of 
all  were  combined,  possessed  no  private,  individual,  beneficial  in- 
terest in  the  property  confided  to  their  protection.  Yet  the  con- 
tract would  at  that  time  have  been  deemed  sacred  by  all.  What 
has  since  occurred  to  strip  it  of  its  inviolability?  Circumstances 
have  not  changed  it.  In  reason,  in  justice,  and  in  law  it  is  now 
what  it  was  in  1769. 

This  is  plainly  a  contract  to  which  the  donors,  the  trustees,  and 
the  crown  (to  whose  rights  and  obligations  New  Hampshire  suc- 
ceeds) were  the  original  parties.  It  is  a  contract  made  on  a  valu- 
able consideration.  It  is  a  contract  for  the  security  and  disposi- 
tion of  property.  It  is  a  contract  on  the  faith  of  which  real  and 
personal  estate  has  been  conveyed  to  the  corporation.  It  is  then 
a  contract  within  the  letter  of  the  constitution,  ^  and  within  its 
spirit  also,  unless  the  fact  that  the  property  is  invested  by  the 
donors  in  trustees  for  the  promotion  of  religion  and  education, 
for  the  benefit  of  persons  who  are  perpetually  changing,  though 
the  objects  remain  the  same,  shall  create  a  particular  exception, 
taking  this  case  out  of  the  prohibition  contained  in  the  constitu- 
tion. 

It  is  more  than  possible  that  the  preservation  of  rights  of  this 
description  was  not  particularly  in  the  view  of  the  framers  of  the 
constitution  when  the  clause  under  consideration  was  introduced 
into  that  instrument.  It  is  probable  that  interferences  of  more 
frequent  recurrence,  to  which  the  temptation  was  stronger,  and 
of  which  the  mischief  was  more  extensive,  constituted  the  great 
motive  for  imposing  this  restriction  on  the  state  legislatures.  But 
although  a  particular  and  a  rare  case  may  not,  in  itself,  be  of  suf- 
ficient magnitude  to  induce  a  rule,  yet  it  must  be  governed  by  the 
rule,  when  established,  unless  some  plain  and  strong  reason  for 
excluding  it  can  be  given.  It  is  not  enough  to  say  that  this  par- 
ticular case  was  not  in  the  mind  of  the  convention  when  the 
article  was  framed,  nor  of  the  American  people  when  it  was 
adopted.  It  is  necessary  to  go  farther,  and  to  say  that,  had  this 
particular  case  been  suggested,  the  language  would  have  been  so 
varied  as  to  exclude  it,  or  it  would  have  been  made  a  special 
exception.  The  case  being  within  the  words  of  the  rule,  must  be 
within   its   operation   likewise,    unless   there   be   something   in   the 


TRUSTEES    OF   DARTMOUTH    COLLEGE    V.    WOODWARD.  95 

literal  construction  so  obviously  absurd,  or  mischievous,  or  repug- 
nant to  the  general  spirit  of  the  instrument,  as  to  justify  those 
who   expound   the  constitution   in  making  it  an   exception. 

On  what  safe  and  intelligible  ground  can  this  exception  stand? 
There  is  no  expression  in  the  constitution,  no  sentiment  delivered 
by  its  contemporaneous  expounders,  which  would  justify  us  in 
making  it.  In  the  absence  of  all  authority  of  this  kind,  is  there, 
in  the  nature  and  reason  of  the  case  itself,  that  which  would  sus- 
tain a  construction  of  the  constitution  not  warranted  by  its  words  ? 
Are  contracts  of  this  description  of  a  character  to  excite  so  little 
interest  that  we  must  exclude  them  from  the  provisions  of  the 
constitution  as  being  unworthy  of  the  attention  of  those  who 
framed  the  instrument?  Or  does  public  policy  so  imperiously  de- 
mand their  remaining  exposed  to  legislative  alteration  as  to  com- 
pel us,  or  rather  permit  us,  to  say  that  these  words,  which  were 
introduced  to  give  stability  to  contracts,  and  which  in  their  plain 
import  comprehend  this  contract,  must  yet  be  so  construed  as  to 
exclude  it? 

Almost  all  eleemosynary  corporations,  those  which  are  created 
for  the  promotion  of  religion,  of  charity,  or  of  education,  are  of 
the  same  character.  The  law  of  this  case  is  the  law  of  all.  In 
every  literary  or  charitable  institution,  unless  the  objects  of  the 
bounty  be  themselves  incorporated,  the  whole  legal  interest  is  in 
trustees,  and  can  be  asserted  only  by  them.  The  donors  or  claim- 
ants of  the  bounty,  if  they  can  appear  in  court  at  all,  can  appear 
only  to  complain  of  the  trustees.  In  all  other  situations  they  are 
identified  with,  and  personated  by,  the  trustees,  and  their  rights 
are  to  be  defended  and  maintained  by  them.  Religion,  charity 
and  education  are,  in  the  law  of  England,  legatees  or  donees, 
capable  of  receiving  bequests  or  donations  in  this  form.  They 
appear  in  court,  and  claim  or  defend  by  the  corporation.  Are 
they  of  so  little  estimation  in  the  United  States  that  contracts  for 
their  benefit  must  be  excluded  from  the  protection  of  words 
which,  in  their  natural  import,  include  them?  Or  do  such  con- 
tracts so  necessarily  require  new  modeling  by  the  authority  of  the 
legislature  that  the  ordinary  rules  of  construction  must  be  disre- 
garded in  order  to  leave  them  exposed  to  legislative  alteration? 

All  feel  that  these  objects  are  not  deemed  unimportant  in  the 
United  .States.  The  interest  which  this  case  has  excited  proves 
that  they  are  not.  The  framers  of  the  constitution  did  not  deem 
them  unworthy  of  its  care  and  protection.  They  have,  though  in 
a  different  mode,  manifested  their  respect  for  science  by  reserving 
to  the  government  of  the  Union  the  power  "to  promote  the  prog- 
ress of  science  and  useful  arts  by  securing  for  limited  times  to 
authors  and  inventors  the  exclusive  right  to  their  respective 
writings  and  discoveries."  They  have  so  far  withdrawn  science 
and  the  useful  arts  from  the  action  of  the  state  governments. 
Why,  then,  should  they  be  supposed  so  regardless  of  contracts 
made   for  the  advancement  of  literature  as   to  intend  to  exclude 


96  THE   CORPORATION   AND  THE  STATE. 

them  from  provisions  made  for  the  security  of  ordinary  contracts 
between  man  and  man?  No  reason  for  making  this  supposition 
is  perceived. 

If  the  insignificance  of  the  object  does  not  require  that  we 
should  exclude  contracts  respecting  it  from  the  protection  of  the 
constitution,  neither,  as  we  conceive,  is  the  policy  of  leaving  them 
subject  to  legislative  alteration  so  apparent  as  to  require  a  forced 
construction  of  that  instrument  in  order  to  effect  it.  These  elee- 
mosynary institutions  do  not  fill  the  place  which  would  otherwise 
be  occupied  by  government,  but  that  which  would  otherwise  re- 
main vacant.  They  are  complete  acquisitions  to  literature.  They 
are  donations  to  education,  donations  which  any  government  must 
be  disposed  rather  to  encourage  than  to  discountenance.  It 
requires  no  very  critical  examination  of  the  human  mind  to  enable 
us  to  determine  that  one  great  inducement  to  these  gifts  is  the 
conviction  felt  by  the  giver  that  the  disposition  he  makes  of  them 
is  immutable.  It  is  probable  that  no  man  ever  was,  and  that  no 
man  ever  will  be,  the  founder  of  a  college,  believing  at  the  time 
that  an  act  of  incorporation  constitutes  no  security  for  the  insti- 
tution; believing  that  it  is  immediately  to  be  deemed  a  public 
institution,  whose  funds  are  to  be  governed  and  applied,  not  by 
the  will  of  the  donor,  but  by  the  will  of  the  legislature.  All  such 
gifts  are  made  in  the  pleasing,  perhaps  delusive,  hope  that  the 
charity  will  flow  forever  in  the  channel  which  the  givers  have 
marked  out  for  it.  If  every  man  finds  in  his  own  bosom  strong 
evidence  of  the  universality  of  this  sentiment,  there  can  be  but 
little  reason  to  imagine  that  the  framers  of  our  constitution  were 
strangers  to  it,  and  that,  feeling  the  necessity  and  policy  of  giving 
permanence  and  security  to  contracts,  of  withdrawing  them  from 
the  influence  of  legislative  bodies,  whose  fluctuating  policy  and 
repeated  interferences  produced  the  most  perplexing  and  injurious 
embarrassments,  they  still  deemed  it  necessary  to  leave  these  con- 
tracts subject  to  those  interferences.  The  motives  for  such  an 
exception  must  be  very  powerful  to  justify  the  construction  which 
makes  it. 

The  motives  suggested  at  the  bar  grow  out  of  the  original  ap- 
pointment of  the  trustees,  which  is  supposed  to  have  been  in  a 
spirit  hostile  to  the  genius  of  our  government,  and  the  presump- 
tion that,  if  allowed  to  continue  themselves,  they  now  are,  and 
must  remain  forever,  what  they  originally  were.  Hence  is  in- 
ferred the  necessity  of  applying  to  this  corporation,  and  to  other 
similar  corporations,  the  correcting  and  improving  hand  of  the 
legislature. 

It  has  been  urged  repeatedly,  and  certainly  with  a  degree  of 
earnestness  which  attracted  attention,  that  the  trustees,  deriving 
their  power  from  a  regal  source,  must  necessarily  partake  of  the 
spirit  of  their  origin,  and  that  their  first  principles,  unimproved 
by  that  resplendent  light  which  has  been  shed  around  them,  must 
continue  to  govern  the  college  and  to  guide  the  students.     Before 


TRUSTEES   OF  DARTMOUTH    COLLEGE   V.    WOODWARD.  97 

we  inquire  into  the  influence  which  this  argument  ought  to  have 
on  the  constitutional  question,  it  may  not  be  amiss  to  examine 
the  fact  on  which  it  rests.  The  first  trustees  were  undoubtedly 
named  in  the  charter  by  the  crown,  but  at  whose  suggestion  were 
they  named?  By  whom  were  they  selected?  The  charter  informs 
us.  Dr.  W'heelock  had  represented  "that,  for  many  weighty  rea- 
sons, it  would  be  expedient  that  the  gentlemen  whom  he  had 
already  nominated  in  his  last  will  to  be  trustees  in  America  should 
be  of  the  corporation  now  proposed."  When,  afterwards,  the 
trustees  are  named  in  the  charter,  can  it  be  doubted  that  the  per- 
sons mentioned  by  Dr.  W'heelock  in  his  will  were  appointed? 
Some  were  probably  added  by  the  crown,  with  the  approbation 
of  Dr.  Wheelock.  Among  these  is  the  doctor  himself.  If  any 
others  were  appointed  at  the  instance  of  the  crown,  they  are  the 
governor,  three  members  of  the  council,  and  the  speaker  of  the 
house  of  representatives  of  the  colony  of  New  Hampshire.  The 
stations  filled  by  these  persons  ought  to  rescue  them  from  any 
other  imputation  than  too  great  a  dependence  on  the  crown.  If, 
in  the  revolution  that  followed,  they  acted  under  the  influence  of 
this  sentiment,  they  must  have  ceased  to  be  trustees;  if  they  took 
part  with  their  countrymen,  the  imputation  which  suspicion  might 
excite  would  no  longer  attach  to  them.  The  original  trustees, 
then,  or  most  of  them,  were  named  by  Dr.  W^heelock.  and  those 
who  v/ere  added  to  his  nomination,  most  probably  with  his  ap- 
probation, were  among  the  most  eminent  and  respectable  indi- 
viduals in  New  Hampshire. 

The  only  evidence  which  we  possess  of  the  character  of  Dr. 
Wheelock  is  furnished  by  this  charter.  The  judicious  means  em- 
ployed for  the  accomplishment  of  his  object,  and  the  success 
which  attended  his  endeavors,  would  lead  to  the  opinion  that  he 
united  a  sound  understanding  to  that  humanity  and  benevolence 
which  suggested  his  undertaking.  It  surely  cannot  be  assumed 
that  his  trustees  were  selected  without  judgment.  With  as  little 
probability  can  it  be  assumed  that,  while  the  light  of  science  and 
of  liberal  principles  pervades  the  whole  community,  these  orig- 
inally benighted  trustees  remain  in  utter  darkness,  incapable  of 
participating^  in  the  general  improvement ;  that,  while  the  human 
race  is  rapidly  advancing,  they  are  stationary.  Reasoning  a 
priori,  we  should  believe  that  learned  and  intelligent  men,  selected 
by  its  patrons  for  the  government  of  a  literary  institution,  would 
select  learned  and  intelligent  men  for  their  successors;  men  as 
well  fitted  for  the  government  of  a  college  as  those  who  might 
be  chosen  by  other  means.  Should  this  reasoning  ever  prove 
erroneous  in  a  particular  case,  public  opinion,  as  has  been  stated 
at  the  bar,  would  correct  the  institution.  The  mere  possibility 
of  the  contrary  would  not  justify  a  construction  of  the  constitu- 
tion which  should  exclude  these  contracts  from  the  protection  of 
a  provision  whose  terms  comprehend  them. 

The  opinion  of  the  court,  after  mature  deliberation,  is  that  this 
7 — Private  Corp. 


98  THE  CORPORATION   AND  THE   STATE. 

is  a  contract,  the  obligation  of  which  cannot  be  impaired  without 
violating  the  constitution  of  the  United  States.  This  opinion  ap- 
pears to  us  to  be  equally  supported  by  reason  and  by  the  former 
decisions  of  this  court. 

2.  We  next  proceed  to  the  inquir}-  whether  its  obligation  has 
been  impaired  by  those  acts  of  the  legislature  of  New  Hampshire 
to  which  the  special  verdict  refers. 

From  the  review  of  this  charter  which  has  been  taken  it  ap- 
pears that  the  whole  power  of  governing  the  college,  of  appoint- 
ing and  removing  tutors,  of  fixing  their  salaries,  of  directing  the 
course  of  study  to  be  pursued  by  the  students,  and  of  filling  up 
vacancies  created  in  their  own  body,  was  vested  in  the  trustees. 
On  the  part  of  the  crown  it  was  expressly  stipulated  that  this 
corporation,  thus  constituted,  should  continue  forever,  and  that 
the  number  of  trustees  should  forever  consist  of  tw^elve,  and  no 
more.  By  this  contract  the  crown  was  bound,  and  could  have 
made  no  violent  alteration  in  its  essential  terms  without  impair- 
ing its  obligation. 

By  the  revolution  the  duties,  as  well  as  the  powers,  of  govern- 
ment devolved  on  the  people  of  New  Hampshire.  It  is  admitted 
that  among  the  latter  was  comprehended  the  transcendant  power 
of  parliament,  as  well  as  that  of  the  executive  department.  It  is 
too  clear  to  require  the  support  of  argument  that  all  contracts 
and  rights  respecting  property  remained  unchanged  by  the  revo- 
lution. The  obligations,  then,  which  were  created  by  the  charter 
to  Dartmouth  College  were  the  same  in  the  new  that  they  had 
been  in  the  old  government.  The  power  of  the  government  was 
also  the  same.  A  repeal  of  this  charter  at  any  time  prior  to  the 
adoption  of  the  present  constitution  of  the  United  States  would 
have  been  an  extraordinary  and  unprecedented  act  of  power,  but 
one  which  could  have  been  contested  only  by  the  restrictions  upon 
the  legislature  to  be  found  in  the  constitution  of  the  state.  But 
the  constitution  of  the  United  States  has  imposed  this  additional 
limitation,  that  the  legislature  of  a  state  shall  pass  no  act  "im- 
pairing the  obligation  of  contracts." 

It  has  been  already  stated  that  the  act  "to  amend  the  charter, 
and  enlarge  and  improve  the  corporation  of  Dartmouth  College," 
increases  the  number  of  trustees  to  twenty-one,  gives  the  appoint- 
ment of  the  additional  members  to  the  executive  of  the  state,  and 
creates  a  board  of  overseers,  to  consist  of  twenty-five  persons,  of 
whom  twenty-one  are  also  appointed  by  the  executive  of  New 
Hampshire,  who  have  power  to  inspect  and  control  the  most  im- 
portant acts  of  the  trustees. 

On  the  eflFect  of  this  law  two  opinions  cannot  be  entertained. 
Between  acting  directly  and  acting  through  the  agency  of  trus- 
tees and  overseers  no  essential  difference  is  perceived.  The  whole 
power  of  governing  the  college  is  transferred  from  trustees  ap- 
pointed according  to  the  will  of  the  founder,  expressed  in  the 
charter,  to  the  executive  of  New  Hampshire.     The  management 


TRUSTERS  OF  DARTMOUTH  COLLEGE  V.  WOODWARD.       99 

and  application  of  the  funds  of  this  eleemosynary  institution, 
which  are  placed  by  the  donors  in  the  hands  of  trustees  named  in 
the  charter,  and  empowered  to  perpetuate  themselves,  are  placed 
by  this  act  under  the  control  of  the  government  of  the  state.  The 
will  of  the  state  is  substituted  for  the  will  of  the  donors  in  every 
essential  operation  of  the  college.  This  is  not  an  immaterial 
change.  The  founders  of  the  college  contracted  not  merely  for 
the  perpetual  application  of  the  funds  which  they  gave  to  the 
objects  for  which  those  funds  were  given;  they  contracted  also 
to  secure  that  application  by  the  constitution  of  the  corporation. 
They  contracted  for  a  system  which  should,  as  far  as  human 
foresight  can  provide,  retain  forever  the  government  of  the  lit- 
erary institution  they  had  formed  in  the  hands  of  persons  ap- 
proved by  themselves.  This  system  is  totally  changed.  The  char- 
ter of  1769  exists  no  longer.  It  is  reorganized,  and  reorganized 
in  such  a  manner  as  to  convert  a  literary  institution,  moulded 
according  to  the  will  of  its  founders,  and  placed  under  the  con- 
trol of  private  literary  men,  into  a  machine  entirely  subservient 
to  the  will  of  government.  This  may  be  for  the  advantage  of 
this  college  in  particular,  and  may  be  for  the  advantage  of  litera- 
ture in  general,  but  it  is  not  according  to  the  will  of  the  donors, 
and  is  subversive  of  that  contract  on  the  faith  of  which  their 
property   was  given. 

In  the  view  which  has  been  taken  of  this  interesting  case,  the 
court  has  confined  itself  to  the  rights  possessed  by  the  trustees,  as 
the  assignees  and  representatives  of  the  donors  and  founders,  for 
the  benefit  of  religion  and  literature.  Yet  it  is  not  clear  that  the 
trustees  ought  to  be  considered  as  destitute  of  such  beneficial  in- 
terest in  themselves  as  the  law  may  respect.  In  addition  to  their 
being  the  legal  owners  of  the  property,  and  to  their  having  a  free- 
hold right  in  the  powers  confided  to  them,  the  charter  itself  coun- 
tenances the  idea  that  trustees  may  also  be  tutors  with  salaries. 
The  first  president  was  one  of  the  original  trustees,  and  the  char- 
ter provides  that  in  case  of  vacancy  in  that  ofifice  "the  senior  pro- 
fessor or  tutor,  being  one  of  the  trustees,  shall  exercise  the  ofifice 
of  president  until  the  trustees  shall  make  choice  of  and  appoint  a 
president."  According  to  the  tenor  of  the  charter,  then,  the  trus- 
tees might,  without  impropriety,  appoint  a  president  and  other 
professors  from  their  own  body.  This  is  a  power  not  entirely  un- 
connected with  an  interest.  Even  if  the  proposition  of  the  coun- 
sel for  the  defendant  were  sustained;  if  it  were  admitted  that 
those  contracts  only  are  protected  by  the  constitution,  a  benefi- 
cial interest  in  which  is  vested  in  the  party  who  appears  in  court 
to  assert  that  interest ;  yet  it  is  by  no  means  clear  that  the 
tru.stees  of  Dartmouth  College  have  no  beneficial  interest  in  them- 
selves. 

But  the  court  has  deemed  it  unnecessary  to  investigate  this  par- 
ticular point,  being  of  opinion,  on  general  principles,  that  in  these 
private  eleemosynary   institutions  the  body  corporate,   as   possess- 


lOO  THE   CORPORATION   AND  THE   STATE. 

ing  the  whole  legal  and  equitable  interest,  and  completely  repre- 
senting the  donors,  for  the  purpose  of  executing  the  trust,  has 
rights  which  are  protected  by  the  constitution. 

It  results  from  this  opinion  that  the  acts  of  the  legislature  of 
New  Hampshire,  which  are  stated  in  the  special  verdict  found  in 
this  cause,  are  repugnant  to  the  constitution  of  the  United  States, 
and  that  the  judgment  on  this  special  verdict  ought  to  have  been 
for  the  plaintiffs.  The  judgment  of  the  state  court  must  therefore 
be  reversed. 


STONE  V.  MISSISSIPPI. 

1879.     loi  U.  S.  814,  125  L.  ed.  1079. 

Charter  as  a  Contract — License. 

MR.  CHIEF  JUSTICE  WAITE:  It  is  now  too  late  to  con- 
tend that  any  contract  which  a  State  actually  enters  into  when 
granting  a  charter  to  a  private  corporation,  is  not  within  the  pro- 
tection of  the  clause  in  the  Constitution  of  the  United  States  that 
prohibits  States  from  passing  laws  impairing  the  obligation  of 
contracts.  Art.  i,  sec.  10.  The  doctrine  of  the  Trustees  of  Dart- 
mouth College  v.  Woodward,  4  Wheat.  518,  announced  by  this 
court  more  than  sixty  years  ago,  have  become  so  imbedded  in  the 
jurisprudence  of  the  United  States  as  to  make  them,  to  all  in- 
tents and  purposes,  a  part  of  the  Constitution  itself.  In  this  con- 
nection, however,  it  is  to  be  kept  in  mind  that  it  is  not  the  charter 
which  is  protected,  but  only  any  contract  the  charter  may  contain. 
If  there  is  no  contract,  there  is  nothing  in  the  grant  on  which  the 
Constitution  can  act.  Consequently,  the  first  inquiry  in  this  class 
of  cases  always  is,  whether  a  contract  has,  in  fact,  been  entered 
into,  and  if  so,  what  its  obligations  are. 

In  the  present  case  the  question  is,  whether  the  State  of  Mis- 
sissippi, in  its  sovereign  capacity,  did,  by  the  charter  now  under 
consideration,  bind  itself  irrevocably  by  a  contract  to  permit  "The 
Mississippi  Agricultural,  Educational  and  Manufacturing  Aid 
Society,"  for  twenty-five  years,  "to  receive  subscriptions,  and  sell 
and  dispose  of  certificates  of  subscriptions  which  shall  entitle  the 
holders  thereof  to"  "any  lands,  books,  paintings,  statues,  antiques, 
scientific  instruments  or  apparatus,  or  any  other  property  or 
thing  that  may  be  ornamental,  valuable  or  useful,"  "awarded  to 
them"  "by  the  casting  of  lot,  chance  or  otherwise."  There  can  be 
no  dispute  but  that,  under  this  form  of  words,  the  Legislature  of 
the  State  chartered  a  lottery  company,  having  all  the  powers  in- 
cident to  such  a  corporation,  for  twenty-five  years,  and  that,  in 
consideration  thereof,  the  company  paid  into  the  State  treasury 
$5,000  for  the  use  of  a  university,  and  agreed  to  pay,  and  until 
the  commencement  of  this  suit  did  pay,  an  annual  tax  of  $1,000 


STONE   V.    MISSISSIPPI.  101 

and  "One  half  of  one  per  cent,  on  the  amount  of  receipts  derived 
from  the  sale  of  certificates  or  tickets."  If  the  Legislature  that 
granted  this  charter  had  the  power  to  bind  the  people  of  the 
State  and  all  succeeding  Legislatures  to  allow  the  corporation  to 
continue  its  corporate  business  during  the  whole  term  of  its 
authorized  existence,  there  is  no  doubt  about  the  sufficiency  of  the 
language  employed  to  effect  that  object,  although  there  was  an 
evident  purpose  to  conceal  the  vice  of  the  transaction  by  the 
phrases  that  were  used.  Whether  the  alleged  contract  exists 
therefore,  or  not,  depends  upon  the  authority  of  the  Legislature 
to  bind  the  State  and  the  people  of  the  State  in  that  way. 

All  agree  that  the  Legislature  cannot  bargain  away  the  police 
power  of  a  State.  "Irrevocable  grants  of  property  and  franchises 
may  be  made  if  they  do  not  impair  the  supreme  authority  to  make 
laws  for  the  right  government  of  the  State ;  but  no  Legislature 
can  curtail  the  power  of  its  successors  to  make  such  laws  as  they 
may  deem  proper  in  matters  of  police."  Metropolitan  Board  of 
Excise  V.  Barrie,  34  N.  Y.  657;  Boyd  v.  Alabama,  94  U.  S.  645. 
Many  attempts  have  been  made  in  this  court  and  elsewhere  to 
define  the  police  power,  but  never  with  entire  success.  It  is  al- 
ways easier  to  determine  whether  a  particular  case  comes  within 
the  general  scope  of  the  power,  than  to  give  an  abstract  definition 
of  the  power  itself  w'hich  will  be  in  all  respects  accurate.  No 
one  denies,  however,  that  it  extends  to  all  matters  aft'ecting  the 
public  health  or  the  public  morals.  Beer  Co.  v.  Massachusetts, 
97  U.  S.  25;  Patterson  v.  Kentucky,  97  U.  S.  501.  Neither  can 
it  be  denied  that  lotteries  are  proper  subjects  for  the  exercise  of 
this  power.  We  are  aware  that  formerly,  when  the  sources  of 
public  revenue  were  fewer  than  now,  they  were  used  in  some  or 
all  of  the  States,  and  even  in  the  District  of  Columbia,  to  raise 
money  for  the  erection  of  public  buildings,  making  public  im- 
provements, and  not  unfrequently  for  educational  and  religious 
purposes ;  but  this  court  said,  more  than  thirty  years  ago,  speaking 
through  Mr.  Justice  Grier,  in  Phalen  v.  Mrginia,  8  How.  163.  168, 
that  "Experience  has  shown  that  the  common  forms  of  gambling 
are  comparatively  innocuous  when  placed  in  contrast  with  the 
wide-spread  pestilence  of  lotteries.  The  former  are  confined  to 
a  few  persons  and  places,  but  the  latter  infests  the  whole  com- 
munity ;  it  enters  every  dwelling ;  it  reaches  every  class ;  it  preys 
upon  the  hard  earnings  of  the  poor;  and  it  plunders  the  ignorant 
and  simple."  Happily,  under  the  influence  of  restrictive  legisla- 
tion, the  evils  are  not  so  apparent  now ;  but  we  very  much  fear 
that,  with  the  same  opportunities  of  indulgence,  the  same  results 
would  be  manifested. 

If  lotteries  are  to  be  tolerated  at  all,  it  is,  no  doubt,  better 
that  they  should  be  regulated  by  law,  so  that  the  people  may  be 
protected  as  far  as  possible  against  the  inherent  vices  of  the 
system ;  but  that  they  are  demoralizing  in  their  eff'ects,  no  matter 
how   carefully   regulated,    cannot   admit   of   a   doubt.     When   the 


I02  THE   CORPORATION   AND  THE   STATE. 

government  is  untrammeled  by  any  claim  of  vested  rights  or  char- 
tered privileges,  no  one  has  ever  supposed  that  lotteries  could 
not  lawfully  be  suppressed,  and  those  who  manage  them  punished 
severely  as  violators  of  the  rules  of  social  morality.  From  1822 
to  1867,  without  any  constitutional  requirement,  they  were  pro- 
hibited by  law  in  Mississippi,  and  those  who  conducted  them 
punished  as  a  kind  of  gamblers.  During  the  Provisional  Govern- 
ment of  that  State,  in  1867,  at  the  close  of  the  late  civil  war,  the 
present  Act  of  incorporation,  with  more  of  like  character,  was 
passed.  The  next  year,  1868,  the  people,  in  adopting  a  new  Con- 
stitution with  a  view  to  the  resumption  of  their  political  rights 
as  one  of  the  United  States,  provided  that  "The  Legislature  shall 
never  authorize  any  lottery,  nor  shall  the  sale  of  lottery  tickets 
be  allowed,  nor  shall  any  lottery  heretofore  authorized  be  per- 
mitted to  be  drawn,  or  tickets  therein  to  be  sold."  Art.  12,  sec. 
15.  There  is  now  scarcely  a  State  in  the  Union  where  lotteries 
are  tolerated,  and  Congress  has  enacted  a  special  statute,  the 
object  of  which  is  to  close  the  mails  against  them.  Rev.  St.,  sec. 
3894;  19  Stat,  at  L.  90,  sec.  2. 

The  question  is,  therefore,  directly  presented,  whether,  in  view 
of  these  facts,  the  Legislature  of  a  State  can,  by  the  charter  of  a 
lottery  company,  defeat  the  will  of  the  people,  authoritatively 
expressed,  in  relation  to  the  further  continuance  of  such  business 
in  their  midst.  We  think  it  cannot.  No  Legislature  can  bargain 
away  the  public  health  or  the  public  morals.  The  people  them- 
selves cannot  do  it,  much  less  their  servants.  The  supervision  pf 
both  these  subjects  of  governmental  power  is  continuing  in  its 
nature,  and  they  are  to  be  dealt  with  as  the  special  exigencies  of 
the  moment  may  require.  Government  is  organized  with  a  view 
to  their  preservation,  and  cannot  devest  itself  of  the  power  to 
provide  for  them.  For  this  purpose,  the  largest  legislative^  discre- 
tion is  allowed,  and  the  discretion  cannot  be  parted  with  any 
more  than  the  power  itself.     Beer  Co.  v.   Massachusetts,   supra. 

In  Trustees  of  Dartmouth  College  v.  Woodward,  4  Wheat.  518, 
it  was  argued  that  the  contract  clause  of  the  Constitution,  if 
given  the  effect  contended  for  in  respect  to  corporate  franchises, 
"would  be  an  unprofitable  and  vexatious  interference  with  the  in- 
ternal concerns  of  a  state,  would,  unnecessarily  and  unwisely, 
embarrass  its  legislation,  and  render  immutable  those  civil  insti- 
tutions which  are  established  for  the  purpose  of  internal  govern- 
ment, and  which  to  subserve  those  purposes,  ought  to  vary  with 
varying  circumstances"  (p.  628)  ;  but  Mr.  Chief  Justice  Marshall, 
when  he  announced  the  opinion  of  the  court,  was  careful  to  say 
(p.  629),  "that  the  framers  of  the  Constitution  did  not  intend  to 
restrain  States  in  the  regulation  of  their  civil  institutions,  adopted 
for  internal  government,  and  that  the  instrument  they  have  given 
us  is  not  to  be  so  construed."  The  present  case,  we  think,  comes 
within  this  limitation.  We  have  held,  not,  however,  without 
strong  opposition  at  times,  that  this  clause  protected  a  corporation 


STONE    V.    MISSISSIPPI.  IO3 

in  its  charter  exemptions  from  taxation.  While  taxation  is,  in 
general,  necessary  for  the  support  of  government,  it  is  not  part 
of  the  government  itself.  Government  was  not  organized  for  the 
purposes  of  taxation,  but  taxation  may  be  necessary  for  the  pur- 
poses of  government.  As  such,  taxation  becomes  an  incident  to 
the  exercise  of  the  legitimate  functions  of  government,  but  noth- 
ing more.  No  government,  dependent  on  taxation  for  support, 
can  bargain  away  its  whole  power  of  taxation,  for  that  would 
be  substantially  abdication.  All  that  has  been  determined  thus 
far  is,  that  for  a  consideration  it  may,  in  the  exercise  of  a  rea- 
sonable discretion,  and  for  the  public  good,  surrender  a  part  of 
its  powers  in  this  particular. 

But  the  power  of  governing  is  a  trust  committed  by  the  people 
to  the  government,  no  part  of  which  can  be  granted  away.  The 
people,  in  their  sovereign  capacity,  have  established  their  agencies 
for  the  preservation  of  the  public  health  and  the  public  morals, 
and  the  protection  of  public  and  private  rights.  These  several 
agencies  can  govern  according  to  their  discretion,  if  wdthin  the 
scope  of  their  general  authority,  while  in  power;  but  they  cannot 
give  away  nor  sell  the  discretion  of  those  that  are  to  come  after 
them,  in  respect  to  matters  the  government  of  wdiich,  from  the 
very  nature  of  things,  must  "vary  with  varying  circumstances." 
They  may  create  corporations,  and  give  them,  so  to  speak,  a  lim- 
ited citizenship ;  but  as  citizens,  limited  in  their  privileges,  or 
otherwise,  these  creatures  of  the  government  creation  are  subject 
to  such  rules  and  regulations  as  may  from  time  to  time  be  or- 
dained and  established  for  the  preservation  of  health  and  morality. 
The  contracts  wdiich  the  Constitution  protects  are  those  that 
relate  to  property  rights,  not  governmental.  It  is  not  always 
easy  to  tell  on  which  side  of  the  line  which  separates  govern- 
mental from  property  rights  a  particular  case  is  to  be  put;  but  in 
respect  to  lotteries  there  can  be  no  difficulty.  They  are  not,  in 
the  legal  acceptation  of  the  term,  mala  in  se,  but  as  we  have  just 
seen;  may  properly  be  made  mala  prohibita.  They  are  a  species 
of  gambling,  and  wn-ong  in  their  influences.  Tliey  disturb  the 
checks  and  balances  of  a  well  ordered  community.  '  Society  built 
on  such  a  foundation  would  almost  of  necessity  bring  forth  a 
population  of  speculators  and  gamblers,  living  on  the  expectation 
of  what,  "by  the  casting  of  lots,  or  by  lot.  chance  or  otherwise," 
might^  be  "awarded"  to  them  from  the  accumulations  of  others. 
Certainly  the  right  to  suppress  them  is  governmental,  to  be  ex- 
ercised at  all  times  by  those  in  power,  at  their  discretion.  Any- 
one, therefore,  who  accepts  a  lottery  charter,  does  so  with  the 
implied  understanding  that  the  people,  in  their  sovereign  capacity 
and  through  their  properly  constituted  agencies,  may  resume  it  at 
any  time  wdien  the  public  good  shall  require,  whether  it  be  paid 
for  or  not.  All  that  one  can  get  by  such  a  charter  is  a  suspen- 
sion of  certain  governmental  rights  in  his  favor,  subject  to  with- 
drawal  at   will.      He   has,   in   legal    effect,    nothing   more    than   a 


104  "^^E   CORPORATION   AND  THE  STATE. 

license  to  enjoy  the  privilege  on  the  terms  named  for  the  speci- 
fied time,  unless  it  be  sooner  abrogated  by  the  sovereign  power 
of  the  State.  It  is  a  permit,  good  as  against  existing  laws,  but 
subject  to  future  legislative  and  constitutional  control  or  with- 
drawal. 

On  the  whole,  we  find  no  error  in  the  record,  and  the  judgment 
is  affirmed. 


BEER   COMPANY   v.    MASSACHUSETTS. 

1877.     97  U.  S.  25,  24  L.  ed.  989. 

The  Charter — Legislation  Impairing  the  Obligation  of  a  Contract. 

This  was  a  proceeding  in  the  Superior  Court  of  Suffolk  County, 
Massachusetts,  for  the  forfeiture  of  certain  malt  liquors  belong- 
ing to  the  Boston  Beer  Company,  and  which  had  been  seized  as  it 
was  transporting  them  to  its  place  of  business  in  said  county, 
with  intent  there  to  sell  them  in  violation  of  an  act  of  the  Legis- 
lature of  Massachusetts,  passed  June  19,  1869,  c.  415,  comrnonly 
known  as  the  Prohibitory  Liquor  Law.  The  company  claimed 
that,  under  its  charter,  granted  in  1828,  it  had  the  right  to  man- 
ufacture and  sell  said  liquors,  and  that  said  law  impaired  the 
obligation  of  the  contract  contained  in  that  charter,  and  was  void, 
so  far  as  the  liquors  in  question  were  concerned.  The  court  re- 
fused to  charge  the  jury  to  that  effect,  and  a  verdict  was  found 
against  the  claimant.  The  rulings  of  the  Superior  Court  having 
been  affirmed  by  the  Supreme  Judicial  Court  of  the  Common- 
wealth, the  company  brought  the  case  here.  The  statutes  of 
Massachusetts  bearing  on  the  case  are  referred  to  in  the  opinion 
of  the  court. 

MR.  JUSTICE  BRADLEY  delivered  the  opinion  of  the  court: 
The  question  raised  in  this  case  is  whether  the  charter  of  the 
plaintiff,  which  was  granted  in  1828,  contains  any  contract  the 
obligation  of  which  was  impaired  by  the  prohibitory  liquor  law 
of  Massachusetts,  passed  in  1869,  as  applied  to  the  liquor  in 
question  in  this  suit. 

Some  question  is  made  by  the  defendant  in  error  whether  the 
point  was  properly  raised  in  the  state  courts,  so  as  to  be  the  sub- 
ject of  decision  by  the  highest  court  of  the  state.  ^  It  is  contended 
that,  although  it  was  raised  by  plea,  in  the  municipal  court,^  yet, 
that  plea  being  demurred  to,  and  the  demurrer  being  sustained, 
the  defense  was  abandoned,  and  the  only  issue  on  which  the  par- 
ties went  to  trial  was  the  general  denial  of  the  truth  of  the  com- 
plaint. But  whatever  may  be  the  correct  course  of  proceeding  in 
the  practice  of  courts  of  Massachusetts — a  matter  which  it  is  not 
our  province  to  investigate — it  is  apparent  from  the  record  that 


BEER    COMPANY    V.    MASSACHUSETTS.  IO5 

the  very  point  now  sought  to  be  argued  was  made  on  the  trial  of 
the  cause  in  the  Superior  Court,  and  was  passed  upon,  and  made 
decisive  of  the  controversy,  and  was  afterwards  carried  by  bill  of 
exceptions  to  the  Supreme  Judicial  Court,  and  was  decided  there 
adverse  to  the  plaintiff  in  error  on  the  very  ground  on  which  it 
seeks  a  reversal. 

The  Supreme  Court,  in  its  rescript,  expressly  decides  as  follows : 

"Exceptions  overruled  for  the  reasons  following: 

"The  act  of  1869,  c.  415,  does  not  impair  the  obligations  of  the 
contract  contained  in  the  charter  of  the  claimant,  so  far  as  it  re- 
lates to  the  sale  of  malt  liquors,  but  is  binding  on  the  claimant  to 
the  same  extent  as  on  individuals. 

"The  act  is  in  the  nature  of  a  police  regulation  in  regard  to  the 
sale  of  a  certain  article  of  property,  and  is  applicable  to  the  sale 
of  such  property  by  individuals  and  corporations,  even  where  the 
charter  of  the  corporation  cannot  be  altered  or  repealed  by  the 
Legislature." 

The  judgment  of  the  Superior  Criminal  Court  was  entered  in 
conformity  to  this  rescript,  declaring  the  liquors,  forfeited  to 
the  commonwealth,  and  that  a  warrant  issue  for  the  disposal  of 
the  same. 

This  is  sufficient  for  our  jurisdiction,  and  we  are  bound  to  con- 
sider the  question  which  is  thus  raised. 

As  before  stated,  the  charter  of  the  plaintiff  in  error  was 
granted  in  1828,  by  an  act  of  the  Legislature,  passed  on  the  ist 
of  February  in  that  year,  entitled  "An  Act  to  incorporate  the 
Boston  Beer  Company."  This  act  consisted  of  two  sections.  By 
the  first  it  was  enacted  that  certain  persons  (named),  their  suc- 
cessors and  assigns  "be,  and  they  hereby  are,  made  a  corporation, 
by  the  name  of  The  Boston  Beer  Company,  for  the  purpose  of 
manufacturing  malt  liquors  in  all  their  varieties,  in  the  city  of 
Boston,  and  for  that  purpose  shall  have  all  the  powers  and  priv- 
ileges, and  be  subject  to  all  the  duties  and  requirements,  contained 
in  an  act  passed  on  the  third  day  of  March,  A.  D,  1809,  entitled 
*An  Act  defining  the  general  powers  and  duties  of  manufacturing 
corporations,'  and  the  several  acts  in  addition  thereto."  The  sec- 
ond section  gave  the  company  power  to  hold  such  real  and  per- 
sonal property  to  certain  amounts  as  might  be  found  necessary 
and  convenient  for  carrying  on  the  manufacture  of  malt  liquors 
in  the  city  of  Boston. 

The  general  manufacturing  act  of  1809,  referred  to  in  the  char- 
ter, had  this  clause  as  a  proviso  of  the  seventh  section  thereof: 
"Provided  always,  that  the  Legislature  may  from  time  to  time, 
upon  due  notice  to  any  corporation,  make  further  provisions  and 
regulations  for  the  management  of  the  business  of  the  corpora- 
tion and  for  the  government  thereof,  or  wholly  to  repeal  any  act 
or  part  thereof,  establishing  any  corporation,  as  shall  be  deemed 
expedient." 

A  substitute  for  this  act  was  passed  in  1829,  which  repealed  the 


I06  THE   CORPORATION   AND  THE   STATE, 

act  of  1809,  and  all  acts  in  addition  thereto,  with  this  qualifica- 
tion: "But  this  repeal  shall  not  affect  the  existing  rights  of  any 
person,  or  the  existing  or  future  liabilities  of  any  corporation  or 
any  members  of  any  corporation  now  established,  until  such  cor- 
poration shall  have  adopted  this  act  and  complied  with  the  pro- 
visions herein  contained." 

It  thus  appears  that  the  charter  of  the  company,  by  adopting 
the  provisions  of  the  act  of  1809,  became  subject  to  a  reserved 
power  of  the  Legislature  to  make  further  provisions  and  regula- 
tions for  the  management  of  the  business  of  the  corporation  and 
for  the  government  thereof,  or  wholly  to  repeal  the  act,  or  any 
part  thereof,  establishing  the  corporation.  This  reservation  of 
the  power  was  a  part  of  the  contract. 

But  it  is  contended  by  the  company  that  the  repeal  of  the  act 
of  1809  by  the  act  of  1829  was  a  revocation  or  surrender  of  this 
reserved  power. 

We  cannot  so  regard  it.  The  charter  of  the  company  adopted 
the  provisions  of  the  act  of  1809  as  a  portion  of  itself,  and  those 
provisions  remained  a  part  of  the  charter  notwithstanding  the 
subsequent  repeal  of  the  act.  The  act  of  1829  reserved  a  similar 
power  to  amend  or  repeal  that  act  at  the  pleasure  of  the  Legisla- 
ture, and  declared  that  all  corporations  established  under  it  should 
cease  and  expire  at  the  same  time  when  the  act  should  be  repealed. 
It  can  hardly  be  supposed  that  the  Legislature,  when  it  reserved 
such  plenary  powers  over  the  corporations  to  be  organized  under 
the  new  act,  intended  to  relinquish  all  its  powers  over  the  corpora- 
tions organized  under  or  subject  to  the  provisions  of  the  former 
act.  The  qualification  of  the  repeal  of  the  act  of  1809,  before 
referred  to,  seems  to  be  intended  not  only  to  continue  the  exist- 
ence of  the  corporations  subject  to  it  in  the  enjoyment  of  all 
their  privileges,  but  subject  to  all  their  liabilities,  of  which  the 
reserved   legislative   control   was    one. 

If  this  view  is  correct,  the  Legislature  of  Massachusetts  had 
reserved  complete  power  to  pass  any  law  it  saw  fit,  which  might 
affect  the  powers  of  the  plaintiff'  in  error. 

But  there  is  another  question  in  the  case,  which,  as  it  seems  to 
us,  is  equally  decisive. 

The  plaintiff  in  error  was  incorporated  "for  the  purpose  of 
manufacturing  malt  liquors  in  all  their  varieties,"  it  is  true,  and 
the  right  to  manufacture,  undoubtedly,  as  the  plaintiff's  coimsel 
contends,  included  the  incidental  right  to  dispose  of  the  liquors 
manufactured.  But  although  this  right  or  capacity  was  thus 
granted  in  the  most  unqualified  form,  it  cannot  be  construed  as 
conferring  any  greater  or  more  sacred  right  than  any  citizen  had 
to  manufacture  malt  liquor,  nor  as  exempting  the  corporation 
from  any  control  therein  to  which  a  citizen  would  be  subject,  if 
the  interests  of  the  community  should  require  it.  If  the  public 
safety  or  the  public  morals  require  the  discontinuance  of  any 
manufacture   or   traf^c,    the   hand    of    the    Legislature    cannot   be 


BEER    COMPANY    V.    MASSACHUSETTS.  IO7 

Stayed  from  providing  for  its  discontinuance  by  any  incidental 
inconvenience  which  individuals  or  corporations  may  suffer.  All 
rights  are  held  subject  to  the  police  power  of  the  state. 

We  do  not  mean  to  say  that  property  actually  in  existence,  and 
in  which  the  right  of  the  owner  has  become  vested,  may  be  taken 
for  the  pubilc  good  without  due  compensation.  But  we  infer  that 
the  liquor  in  this  case,  as  in  the  case  of  Bartemeyer  v.  Iowa,  i8 
Wall.  129,  was  not  in  existence  when  the  liquor  law  of  Massa- 
chusetts was  passed.  Had  the  plaintiff  in  error  relied  on  the  ex- 
istence of  the  property  prior  to  the  law,  it  behooved  it  to  show 
that  fact.  But  no  such  fact  is  shown,  and  no  such  point  is  taken. 
The  plaintiff'  in  error  boldly  takes  the  ground  that,  being  a  cor- 
poration, it  has  a  right,  by  contract,  to  manufacture  and  sell  beer 
forever,  notwithstanding  and  in  spite  of  any  exigencies  which  may 
occur  in  the  morals  or  the  health  of  the  community,  requiring 
such  manufacture  to  cease.  We  do  not  so  understand  the  rights 
of  the  plaintiff.  The  Legislature  had  no  power  to  confer  any  such 
rights. 

Whatever  differences  of  opinion  may  exist  as  to  the  extent  and 
boundaries  of  the  police  power,  and  however  difficult  it  may  be  to 
render  a  satisfactory  definition  of  it,  there  seems  to  be  no  doubt 
that  it  does  extend  to  the  protection  of  the  lives,  health  and  prop- 
erty of  the  citizens,  and  to  the  preservation  of  good  order  and  the 
public  morals.  The  Legislature  cannot,  by  any  contract,  divest 
itself  of  the  power  to  provide  for  these  objects.  They  belong  em- 
phatically to  that  class  of  objects  which  demand  the  application 
of  the  maxim  salus  populi  suprema  lex,  and  they  are  to  be  at- 
tained and  provided  for  by  such  appropriate  means  as  the  legisla- 
tive discretion  may  devise.  That  discretion  can  no  more  be  bar- 
gained away  than  the  power  itself.     Boyd  v.  Alabama,  94  U.  S. 

645-. 

Since  we  have  already  held,  in  the  case  of  Bartemeyer  v.  Iowa, 
that  as  a  measure  of  police  regulation,  looking  to  the  preservation 
of  public  morals,  a  state  law  prohibiting  the  manufacture  and 
sale  of  intoxicating  liquors  is  not  repugnant  to  any  clause  of  the 
constitution  of  the  United  States,  we  see  nothing  in  the  present 
case  that  can  afford  any  sufficient  ground  for  disturbing  the  deci- 
sion, of  the   Supreme  Court  of  Massachusetts. 

Of  course,  we  do  not  mean  to  lay  down  any  rule  at  variance 
with  what  this  court  has  decided  with  regard  to  the  paramount 
authority  of  the  constitution  and  laws  of  the  United  States,  re- 
lating to  the  regulation  of  commerce  with  foreign  nations  and 
among  the  several  states,  or  otherwise.  Brown  v.  Maryland,  12 
Wheat.  419;  License  Cases,  5  How.  504;  Passenger  Cases,  7  id. 
283;  Henderson  v.  Mayor  of  New  York,  92  U.  S.  259;  Chy  Lung 
v.  Freeman,  id.  275 ;  Railroad  Company  v.  Husen,  95  id.  465. 
That  question  does  not  arise  in  this  case. 

Judgment  affirmed.^ 

*  As  to  the  extent  of  legislative  control  over  corporations  under  the 


I08  THE   CORPORATION   AND  THE   STATE. 

LOOKER  V.  MAYNARD. 
1900.     179  U.  S.  46,  45  L.  ed.  79,  21  Sup.  Ct.  21. 

This  was  an  information  in  the  nature  of  a  quo  warranto,  filed 
August  I,  1896,  in  the  Supreme  Court  of  the  State  of  Michigan, 
by  Fred  A.  Maynard,  Attorney-General  of  the  State,  at  the  rela- 
tion of  Joseph  W.  Dusenbury  and  Will  J.  Dusenbury,  against 
Oscar  R.  Looker,  Charles  A.  Kent,  Will  S.  Green,  William  A. 
Moore,  Louis  H.  Chamberlain,  William  C.  Colburn,  Benjamin  J. 
Conrad,  John  J.  Mooney  and  Michael  J.  Mooney,  to  try  the  rights 
of  the  defendants  and  of  the  relators  respectively  to  the  offices 
of  members  of  the  board  of  directors  of  the  Michigan  Mutual 
Life  Insurance  Company.  The  right  to  such  offices  was  claimed 
by  the  defendants  under  the  original  articles  of  association  of  the 
company  under  a  statute  subsequently  enacted  by  the  Legislature 
of  the  State,  which  the  defendants  contended  to  be  unconstitu- 
tional and  void  as  impairing  the  obligation  of  the  contract  made 
between  the  State  and  the  corporation  by  its  original  organization. 

The  Constitution  of  Michigan,  adopted  in  1850,  art.  15,  sec.  i, 
is  as  follows :  "Corporations  may  be  formed  under  the  general 
laws,  but  shall  not  be  created  by  special  act,  except  for  municipal 
purposes.  All  laws  passed  pursuant  to  this  section  may  be 
amended,  altered  or  repealed."  i  Charters  and  Constitutions, 
1008. 

The  general  law  of  Michigan  of  March  30,  1869,  entitled  "An 
act  in  relation  to  life  insurance  companies  transacting  business 
within  this  State,"  contained  the  following  provisions: 

By  §  I,  "Any  number  of  persons,  not  less  than  thirteen,  may 
associate  together  and  form  an  incorporated  company  for  the  pur- 
pose of  making  insurance  upon  the  lives  of  individuals,  and  every 
insurance  pertaining  thereto,  and  to  grant,  purchase  and  dispose 
of  annuities." 

By  §  2,  "The  persons  so  associating  shall  subscribe  articles  of 
association,  which  shall  contain" — "4.  The  manner  in  which  the 
corporate  powers  are  to  be  exercised,  the  number  of  directors  and 
other  officers,  and  the  manner  of  electing  the  same,  and  how 
many  of  the  directors  shall  constitute  a  quorum,  and  the  manner 
of  filling  all  vacancies."  "7.  Any  terms  and  conditions  of  mem- 
bership therein,  which  the  corporators  may  have  agreed  upon,  and 
which  they  may  deem  important  to  have  set  forth  in  such  articles." 

By  §  5,  "The  articles  of  association  shall  be  submitted  to  the 
attorney-general  for  his  examination,  and  if  found  by  him  to  be 
in  compliance  with  this  act,  he  shall  so  certify  to  the  secretary  of 
state."     Stat.  1889,  c.  77;  i  Laws  of  Michigan  of  1869,  p.  124. 

Under  that  statute,  the  Michigan  Mutual  Life  Insurance  Corn- 
constitution,  see  also.  People  v.  O'Brien,  111  N.  Y.  1,  18  N.  E.  692, 
2  L.  R.  A.  255,  7  Am.  St.  684.— Ed. 


LOOKER    V.    MAYNARD.  IO9 

pany  was  duly  organized  July  3,  1870,  with  articles  of  association, 
the  fourth  of  which  provided  as  follows : 

"The  corporate  powers  of  the  company  shall  be  exercised  by  a 
board  of  directors,  which  shall  consist  of  twenty-one  members, 
which  may  be  increased  at  the  option  of  the  board  to  not  more 
than  forty.  The  first  meeting  for  the  election  of  directors  shall 
be  called  by  the  present  officers,  and  held  as  soon  as  practicable 
after  these  articles  shall  take  effect.  No  person  shall  be  eligible 
who  is  not  owner  of  at  least  ten  shares  of  the  guarantee  capital 
of  the  company,  and  at  least  two-thirds  of  the  directors  shall  be 
residents  of  the  State  of  Michigan.  The  board,  at  their  first 
meeting,  shall  divide  themselves  by  lot  into  three  equal  classes, 
as  near  as  may  be,  whose  terms  of  office  shall  expire  at  the  end 
of  one,  two  and  three  years,  respectively,  and  thereafter  one-third 
of  the  directors  shall  be  chosen  annually  for  the  class  whose  term 
then  expires,  who  shall  hold  office  for  three  years,  or  until  their 
successors  are  elected;  but  the  first  board  of  directors,  whose 
terms  shall  not  have  expired  previous  to  the  last  Tuesday  in 
January,  shall  continue  in  office  until  the  last  Tuesday  in  January 
following.  The  election  of  directors  shall  be  had  at  the  annual 
meeting  of  the  company,  which  shall  be  held  on  the  last  Tuesday 
in  January  at  the  office  of  the  company  in  Detroit.  They  shall 
be  chosen  by  ballot,  and  a  majority  of  all  the  votes  cast  shall 
elect.  Every  shareholder  shall  be  entitled  to  one  vote  for  direct- 
ors for  every  share  of  guarantee  capital  standing  in  his  name  on 
the  books  of  the  company  and  may  vote  in  person  or  by  proxy. 
And  every  policyholder  insured  in  this  company  for  the  period 
of  his  natural  life  in  the  sum  of  not  less  than  five  thousand  dol- 
lars shall  also  be  entitled  to  one  vote  in  the  annual  election  of 
directors,  which  vote  must  be  given  in  person." 

In  1885  the  legislature  of  Michigan  passed  an  act  entitled  "An 
act  to  secure  the  minority  of  stockholders,  in  corporations  organ- 
ized under  general  laws,  the  power  of  electing  a  representative 
membership  in  boards  of  directors,"  the  first  section  of  which  pro- 
vided as  follows :  "In  all  elections  for  directors  of  any  corpora- 
tion organized  under  any  general  law  of  this  State,  other  than 
municipal,  every  stockholder  shall  have  the  right  to  vote,  in  person 
or  by  proxy,  the  number  of  shares  of  stock  owned  by  him  for 
as  many  persons  as  there  may  be  directors  to  be  elected ;  or  to 
cumulate  said  shares,  and  give  one  candidate  as  many  votes  as 
will  equal  the  number  of  directors  multiplied  by  the  number  of 
shares  of  his  stock;  or  to  distribute  them  on  the  same  principles 
among  as  manv  candidates  as  he  shall  think  fit.  All  such  cor- 
porations  shall  elect  their  directors  annually,  and  the  entire  num- 
ber of  directors  shall  be  ballotted  for  at  one  and  the  same  time, 
and  not  separately."  Stat.  1885,  c.  112;  Public  Acts  of  1885,  p. 
116. 

Directors  were  elected  in  accordance  with  the  articles  of  asso- 
ciation until  the  annual  meeting  of  January  28,   1896,  when  the 


no  THE   CORPORATION   AND  THE   STATE. 

whole  number  of  directors  being  twenty-seven,  of  which  nine 
were  elected  annually,  the  whole  number  of  votes  for  directors 
was  4893;  the  nine  defendants  received  3655  votes  each;  and 
Joseph  W.  Dusenbury,  representing  in  his  own  right  or  by  proxy 
1283  shares,  undertook,  under  the  statute  of  1885,  to  multiply 
the  number  of  his  shares  by  nine,  making  the  number  11,142,  and, 
dividing  this  number  equally,  cast  5571  votes  for  himself  and  5571 
for  Will  J.  Dusenbury;  and,  if  his  claim  had  been  allowed,  they 
two,  the  relators  in  this  case,  would  have  been  elected  directors. 
But  his  claim  was  rejected,  his  vote  was  allowed  on  1238  shares 
only,  and  the  non-defendants  were  declared  elected,  and  assumed 
and  since  exercised  the  offices  of  directors. 

The  Supreme  Court  of  Michigan  held  the  statute  of  1885  to  be 
constitutional  and  valid,  and  adjudged  that  the  relators  were 
elected  directors,  and  should  have  been  so  declared,  in  Mich- 
igan, 498.     The  defendants  sued  out  this  writ  of  error. 

MR.  JUSTICE  GRAY,  after  stating  the  case,  delivered  the 
opinion  of  the  court. 

The  single  question  in  this  case  is  whether  a  power,  reserved 
by  the  constitution  of  a  State  to  its  legislature,  to  alter,_  amend 
or  repeal  future  acts  of  incorporation,  authorizes  the  legislature, 
in  order  (as  declared  in  the  title  of  the  statute  of  Michigan  now 
in  question)  "to  secure  the  minority  of  stockholders,  in  corpora- 
tions organized  under  general  laws,  the  power  of  electing  a  rep- 
resentative membership  in  boards  of  directors,"  to  permit  each 
stockholder  to  cumulate  his  votes  upon  any  one  or  more  candi- 
dates  for   directors. 

By  the  decision  in  the  leading  case  of  Dartmouth  College  v. 
Woodward,  4  Wheat.  518,  it  was  established  that  a  charter  from 
the  State  to  a  private  corporation  created  a  contract,  within  the 
meaning  of  the  clause  in  the  Constitution  of  the  United  States 
forbidding  any  State  to  pass  any  law  impairing  the  obligation  of 
contracts;  and  consequently  that  a  statute  of  the  State  of  New 
Hampshire,  increasing  the  number  of  the  trustees  of  Dartmouth 
College  as  fixed  by  its  charter,  and  providing  for  the  appointment 
of  a  majority  of  the  trustees  by  the  executive  government  of  New 
Hampshire,  instead  of  by  the  board  of  trustees  as  the  charter 
provided,  was  unconstitutional  and  void. 

Mr.  Justice  Story,  in  his  concurring  opinion  in  that  case,  after 
declaring  that  in  his  judgment  it  was  "perfectly  clear  that  any 
act  of  a  legislature  which  takes  any  powers  or  franchises  vested 
by  its  charter  in  a  private  corporation,  or  its  corporate  officers,  of 
which  restrains  or  controls  the  legitimate  exercise  of  them,  or 
transfers  them  to  other  j)ersons,  without  its  assent,  is  a  violation 
of  the  obligations  of  that  charter,"  took  occasion  to  add:  "If  the 
legislature  means  to  claim  such  an  authority,  it  must  be  reserved 
in  the  grant."     4  Wheat.  712. 

After  that  decision,  many  a   State  of  the  Union,   in   order  to 


LOOKER    V.    MAYNARD.  Ill 

secure  to  its  legislature  the  exercise  of  a  fuller  parliamentary  or 
legislative  power  over  corporations  than  would  otherwise  exist, 
inserted,  either  in  its  statutes  or  in  its  constitution,  a  provision 
that  charters  thenceforth  granted  should  be  subject  to  alteration, 
amendment  or  repeal  at  the  pleasure  of  the  legislature.  See 
Greenwood  v.  Freight  Co.,  105  U.  S.  13,  20,  21.  The  effect  of 
such  a  provision,  whether  contained  in  an  original  act  of  incor- 
poration, or  in  a  constitution  or  general  law  subject  to  which  a 
charter  is  accepted,  is  at  the  least,  to  reserve  to  the  legislature 
the  power  to  make  any  alteration  or  amendment  of  a  charter 
subject  to  it,  which  will  not  defeat  or  substantially  impair  the 
object  of  the  grant,  or  any  right  vested  under  the  grant,  and  which 
the  legislature  may  deem  necessary  to  carry  into  effect  the  purpose 
of  the  grant,  or  to  protect  the  rights  of  the  public  or  of  the  cor- 
poration, its  stockholders  or  creditors,  or  to  promote  the  due 
administration  of  its  affairs.  Sherman  v.  Smith,  i  Black,  587; 
Miller  v.  State,  15  Wall.  478;  Holyoke  Co.  v.  Lyman,  15  Wall. 
500;  Sinking  Fund  Cases,  99  U.  S.  700,  720,  721;  Close  v.  Glen- 
wood  Cemetery.  107  U.  S.  466;  Spring  Valley  Water  Works  v. 
Schottler.  no  U.  S.  347;  New  York  &  New  England  Railroad 
V.  Bristol,   151   U.   S.   556. 

As  illustrations  of  the  right  of  the  legislature,  exercising  such 
a  reserved  power,  to  alter  for  the  future  the  liability  of  stock- 
holders to  creditors  of  the  corporation,  or  the  mode  of  computing 
the  votes  of  stockholders  for  directors,  it  will  be  sufficient  to  state 
two  of  the  cases  just  cited. 

The  case  of  Sherman  v.  Smith,  i  Black,  587,  was  as  follows: 
The  general  banking  of  New  York  of  1838,  c.  260,  provided,  in 
§  15,  that  any  number  of  persons  might  associate  to  establish  a 
bank,  upon  the  terms  and  conditions,  and  subject  to  the  liabili- 
ties prescribed  in  this  act;  in  §  23,  that  no  shareholder  of  any 
association  formed  under  this  act  should  be  individually  liable 
for  its  debts,  unless  the  articles  of  association  signed  by  him 
should  declare  that  the  shareholder  should  be  liable;  and,  in  §  32, 
that  the  legislature  might  at  any  time  alter  or  repeal  this  act. 
The  articles  of  association  of  a  corporation  organized  under  this 
act  in  1844  expressly  provided  that  the  shareholders  should  not 
be  individually  liable  for  its  debts.  By  provisions  of  the  consti- 
tution of  New  York  of  1846,  art.  8,  sec.  2,  and  of  the  general 
statute  of  1849,  c.  226,  the  shareholders  of  all  banks  were  made 
liable  for  debts  contracted  by  the  bank  after  January  i,  1850. 
This  court  unanimously  held  that  these  provisions  were  not  un- 
constitutional as  impairing  the  obligation  of  a  contract. 

The  case  of  Miller  v.  State.  15  Wall.  478,  was  this:  By  the 
Revised  Statutes  of  New  York  of  1828.  c.  tit.  3.  it  was  enacted 
that  "the  charter  of  every  corporation  that  shall  hereafter  be 
granted  by  the  legislature  shall  be  subject  to  alteration,  suspension 
and  repeal,  in  the  discretion  of  the  legislature."  The  constitution 
of  New  York  of  1846,  art.  8,  sec.  i.  ordained  as  follows:     "Cor- 


112  THE   CORPORATION   AND  THE   STATE. 

porations  may  be  formed  under  general  laws,  but  shall  not  be 
created  by  special  act,"  except  in  certain  cases.  "All  general  laws 
and  special  acts  passed  pursuant  to  this  section  may  be  altered 
from  time  to  time,  or  repealed."  2  Charters  and  Constitutions, 
1363.  In  1850  the  legislature  passed  a  general  railroad  act  au- 
thorizing the  formation  of  railroad  corporations  with  thirteen 
directors,  and  providing  that  the  subscribers  to  the  articles  of 
association  and  all  who  should  become  stockholders  in  the  com- 
pany should  become  a  corporation,  and  "be  subject  to  the  pro- 
visions contained  in"  the  aforesaid  title  of  the  Revised  Statutes. 
Stat,  1850,  c.  140,  §  I.  In  the  same  year,  a  railroad  corporation 
was  organized  under  that  act  for  the  construction  of  a  railroad 
from  the  city  of  Rochester  to  the  town  of  Portage;  and  in  1851, 
by  a  statute  amending  the  charter  of  the  Rochester,  that  city 
was  authorized  to  become  a  stockholder  in  the  corporation,  and 
to  appoint  four  of  the  thirteen  directors.  Stat.  1851,  c.  389,  §  24. 
In  1867  the  legislature  passed  another  statute,  authorizing  the 
city  to  appoint  seven  of  the  thirteen  directors.  Stat.  1867,  c.  59. 
This  court  upheld  the  validity  of  the  latter  statute,  upon  the 
ground  that  the  reservation  in  the  constitution  of  1846,  and  in 
the  statutes  of  1828  and  1850,  of  the  power  to  alter  or  repeal 
the  charter,  clearly  authorized  the  legislature  to  augment  or  di- 
minish the  number,  or  to  change  the  apportionment,  of  the  direct- 
ors as  the  ends  of  justice  or  the  best  interests  of  all  concerned 
might  require,  15  Wall.  492,  498.  The  full  extent  and  effect  of 
the  decision  are  clearly  brought  out  by  the  opinion  of  two  justices 
who  dissented  for  the  very  reason  that  the  agreement  with  respect 
to  the  number  of  directors  which  the  city  should  elect  was  not  a 
part  of  the  charter  of  the  company,  but  was  an  agreement  be- 
tween third  parties,  outside  of  and  collateral  to  the  charter,  and 
which  the  legislature  could  not  reserve  the  power  to  alter  or  re- 
peal. 15  Wall.  499.  That  case  cannot  be  distinguished  in  prin- 
ciple from  the  case  at  bar. 

Remembering  that  the  Dartmouth  College  case  (which  was  the 
cause  of  the  general  introduction  into  the  legislation  of  the  sev- 
eral States  of  a  provision  reserving  the  power  to  alter,  amend  or 
repeal  acts  of  incorporation),  concerned  the  right  of  a  legisla- 
ture to  make  a  change  in  the  number  and  mode  of  appointment 
of  the  trustees  or  managers  of  a  corporation,  we  cannot  assent 
to  the  theory  that  an  express  reservation  of  the  general  power 
does  not  secure  to  the  legislature  the  right  to  exercise  it  in  this 
respect. 

Judgment  affirmed. 


CHAPTER  VI. 

POWERS. 

DOWNING  V.  MOUNT  WASHINGTON  ROAD  COMPANY. 

i860.     40  N.  H.  230. 

Powers  of  Corporation — Construction  of  Charter. 

Assumpsit  to  recover  the  price  of  certain  vehicles  made  under  a 
contract  with  the  president  of  the  defendant  corporation.  Defend- 
ant denied  the  authority  of  the  president  to  make  such  a  contract. 

BELL,  C.  J.:  Corporations  are  creatures  of  the  legislature, 
having  no  other  powers  than  such  as  are  given  to  them  by  their 
charters,  or  such  as  are  incidental,  or  necessary  to  carry  into 
effect  the  purposes  for  which  they  were  established.  Trustees  v. 
Peaslee,  15  N.  H.  330;  Perrine  v.  Chesapeake  Canal  Co.,  9  How. 
172.  In  giving  a  construction  to  the  powers  of  a  corporation,  the 
language  of  the  charter  should  in  general  neither  be  construed 
strictly  nor  liberally,  but  according  to  the  fair  and  natural  import 
of  it,  with  reference  to  the  purposes  and  objects  of  the  corpora- 
tion. Enfield  Bridge  v.  Hartford  R.  R.,  17  Conn.  454;  Strauss 
V.  Eagle  Insurance  Co.,  5  Ohio   (N.  S.),  39. 

If  the  powers  conferred  are  against  common  right,  and  trench 
in  any  way  upon  the  privileges  of  other  citizens,  they  are,  in  cases 
of  doubt,  to  be  construed  strictly,  but  not  so  as  to  impair  or  de- 
feat the  objects  of  the  incorporation. 

In  the  present  case  the  power  to  take  the  lands  of  others,  and 
to  take  tolls  of  travelers,  must  be  strictly  construed,  if  doubts 
should  arise  on  those  points;  but  it  is  not  seen  that  the  other 
grants  to  the  defendant  corporation  should  not  receive  a  fair  and 
natural  construction. 

The  charter  of  the  Mount  Washington  road  empowers  them  to 
lay  out,  make  and  keep  in  repair,  a  road  from  Peabodv  River 
Valley  to  the  top  of  Mount  Washington,  and  thence  to  some  point 
on  the  northwest  side  of  the  mountain.  It  grants  tolls  on  passen- 
gers and  carriages,  and  authorizes  them  to  take  lands  of  others 
for  their  road,  and  to  build  and  own  toll-houses,  and  erect  gates, 
and  appoint  toll-gatherers  to  collect  their  tolls.  The  remaining 
provisions  contain  the  ordinary  powers  of  corporations  relating 
to  directors,  stock,  dividends,  meetings,  etc.  Laws  of  1853,  chap- 
ter i486. 

This   chapter   confers   the  usual   powers   heretofore  granted   to 
turnpike  corporations,  and  no  others.     The  most  natural  and  sat- 
8 — PuiVATE  Corp.  lit, 


114  POWERS. 

isfactory  mode  of  ascertaining  what  are  the  powers  incidentally 
granted  to  such  companies,  is  to  inquire  what  powers  have  been 
usually  exercised  under  them,  without  question  by  the  public  or 
by  the  corporators.  It  may  be  safely  assumed  that  the  powers 
which  have  not  heretofore  been  found  necessary,  and  have  not 
been  claimed  or  exercised  under  such  charters,  are  not  to  be  con- 
sidered s^enerallv  as  incidentallv  granted.  Such  charters  have  in 
former  years  been  very  common  in  this  and  other  states,  and 
they  have  not,  so  far  as  we  are  aware,  been  understood  as 
authorizing  the  corporations  to  erect  hotels,  or  to  establish  stage 
or  transportation  lines,  to  purchase  horses  or  carriages,  or  to 
employ  drivers  in  transporting  passengers  or  freight  over  their 
roads ;  and  no  such  powers  have  anywhere  been  claimed  or  exer- 
cised under  them.  We  are,  therefore,  of  opinion  that  the  power 
to  establish  stage  and  transportation  lines  to  and  from  the  moun- 
tain, to  purchase  carriages  and  horses  for  the  purpose  of  carry- 
ing on  such  a  business,  was  not  incidentally  granted  to  the  de- 
fendant corporation  by  their  charter.  State  v.  Commissioners,  3 
Zab.  510. 

But  it  is  contended  that  the  power  to  make  this  contract  is  con- 
ferred by  the  act  in  amendment  of  the  charter,  passed  July  12, 
1856.  By  this  act  the  corporation  may  "erect  and  maintain,  lease 
and  dispose  of  any  building  or  buildings  which  may  be  found 
convenient  for  the  accommodation  of  their  business,  and  of  the 
horses  and  carriages  and  travelers  passing  over  their  said  road." 
By  their  business,  which  the  buildings  to  be  erected  were  designed 
to  accommodate,  it  is  said  the  legislature  must  have  intended 
some  permanent  and  continuing  business  beyond  that  of  merely 
building  and  maintaining  a  road;  and  that  it  could  be  no  other 
than  that  of  erecting  a  hotel  on  the  mountain,  and  establishing 
lines  of  carriages,  for  the  purpose  of  carrying  visitors  up  and 
down  the  mountain. 

But  the  foundation  of  this  implication  is  very  slight.  The 
express  grant  is  of  an  authority  to  erect,  etc.,  buildings,  not  of 
all  kinds,  but  such  as  may  be  found  convenient  for  the  accommo- 
dation of  their  business,  and  of  travelers,  etc.  The  business  here 
referred  to  must  be  understood  to  be  such  as  they  are  by  their 
charter  authorized  to  engage  in.  If  nothing  had  been  said  of 
horses  and  travelers,  there  could  hardly  be  any  foimdation  for 
the  idea  that  a  hotel  could  have  been  contemplated  by  the  legis- 
lature. Buildings  suitable  for  the  accommodation  of  their  toll- 
gathers  and  workmen  employed  on  their  road,  would  probably 
be  thought  everything  the  legislature  intended  to  authorize  by 
this  additional  act.  Connected  as  this  authority  now  is  with 
travelers,  horses,  and  carriages,  there  is  scarce  a  pretence  for 
argument  that  this  additional  act  goes  any  further  than  the  orig- 
inal act,  to  authorize  a  stage  and  transportation  company.  It  is 
not  unlikely  that  some  of  the  projectors  of  this  enterprise  in- 
tended to  secure  much  more  extensive  rights  than  those  of  a  turn- 


noWNIiXG  V.    MOUNT  WASHINGTON   ROAD  COMPANY.  II5 

pike  and  hotel  company,  but  it  seems  certain  they  have  not  exhib- 
ited this  feature  of  their  case  to  the  legislature  so  distinctly  as  to 
secure  their  sanction,  and  the  charter  and  its  amendment  as  yet 
justifies  them  in  no  such  claim. 

The  power  of  buying  and  selling  real  and  personal  property  for 
the  legitimate  purposes  of  the  corporation,  and  the  power  of  con- 
tracting generally  for  the  same  purposes,  within  the  limits  pre- 
scribed bv  the  charter,  being  granted,  we  understand  the  principle 
to  be,  that  their  purchases,  sales,  and  contracts  generally,  will  be 
presumed  to  be  made  within  the  legitimate  scope  and  purpose  of 
the  corporation,  until  the  contrary  appears,  and  that  the  burden 
of  showing  that  any  contract  of  a  corporation  is  beyond  its 
legitimate  powers,  rests  on  the  party  who  objects  to  it.  Indiana 
V.  Worum,  6  Hill,  37;  Ex  parte  Peru  Iron  Company,  7  Cow. 
540;  Farmer's  Loan  v.  Clowes,  3  Comst.  470;  same  v.  Curtis,  3 
Seld.  466;  Biers  v.  Phenix  Company,   14  Barb.  358. 

If  a  corporation  attempt  to  enforce  a  contract  made  with  them 
in  a  case  beyond  the  legitimate  limits  of  their  corporate  power, 
that  fact,  being  shown,  will  ordinarily  constitute  a  perfect  defense. 
Green  v.  Seymour,  3  Sandf.  Ch.  285;  Bangor  Boom  Corp.  v. 
Whiting,  29  Me.  123;  Life,  &c..  Company  v.  Manufacturers,  &c.. 
Company,  7  Wend.  31 ;  New  York,  &c.,  Insurance  Company  v. 
Ely.  5  Conn.  560. 

And  if  a  suit  is  brought  upon  a  contract  alleged  to  be  made  by 
the  corporation,  but  which  is  shown  to  be  beyond  its  corporate 
power  to  enter  into,  the  contract  will  be  regarded  as  void,  and 
the  corporation  may  avail  themselves  of  that  defense.  Beach  v. 
Fulton  Bank,  3  Wend.  573 ;  Albert  v.  Savings  Bank,  i  Aid.  Ch. 
Dec.  407 ;  Abbot  v.  Baltimore,  &c..  Company,  i  Md.  Ch.  Dec. 
542 ;  Strauss  v.  Eagle  Insurance  Company,  5  Ohio,  N.  S.  59 ; 
Baron  v.  Mississippi  Insurance  Company,  31  Miss.  116;  Bank  of 
Genesee  v.  Patchin  Bank,  3  Kern.  31c;;  Gage  v.  Newmarket,   18 

Q-  B.  457- 

The  contract  set  up  in  this  case  was  made  not  by  the  corpora- 
tion itself,  by  a  vote,  nor  by  an  agent  expressly  authorized  to 
sign  a  contract  already  drawn,  but  it  was  made  by  the  president 
of  the  corporation,  acting  under  an  appointment  as  their  general 
agent ;  and  it  is  argued  that  he  was  fully  authorized  by  votes  of 
the  corporation  to  bind  them  by  such  a  contract  as  the  present ; 
but  it  is  not  necessary  to  consider  this  question,  as  we  think  it 
settled  that  the  powers  of  the  agents  of  corporations  to  enter 
into  contracts  in  their  behalf  are  limited,  by  the  nature  of  things. 
to  such  contracts  as  the  corporations  are  by  their  charters  author- 
ized to  make.  This  principle  is  distinctly  recognized  in  McCul- 
lough  V.  Moss,  5  Den.  567;  overruling  the  case  of  Moss  v.  Rossie 
Lead  Co..  5  Hill.  137.  and  in  Central  Bank  v.  Empire  Co.,  26 
Barb.  23;  Bank  of  Genesee  v.  Patchin  Bank.  3  Kern.  315. 

This  same  want  of  power  to  give  authority  to  an  agent  to  con- 
tract,   and    thereby    bind    the    corporation    in    matters    beyond    the 


Il6  POWERS. 

scope  of  their  corporate  objects,  must  be  equally  conclusive 
against  any  attempt  to  ratify  such  contract.  What  they  cannot 
do  directly  they  cannot  do  indirectly.  They  cannot  bind  them- 
selves by  the  ratification  of  a  contract  which  they  had  no  author- 
ity to  make.  5  Den.  567,  above  cited.  The  power  of  the  agent 
must  be  restricted  to  the  business  which  the  company  was  au- 
thorized to  do.  Within  the  scope  of  the  business  which  they 
had  power  to  transact,  he,  as  its  agent,  may  be  authorized  to  act 
for  it,  but  beyond  that  he  could  not  be  authorized,  for  its  powers 
extend  no  further. 

This  view  seems  to  us  entirely  conclusive  against  the  claim 
made  for  the  omnibuses  and  model,  and  probably  for  the  baggage 
wagon. 

As  to  the  light  wagon,  that  may  stand  on  a  different  ground. 
Such  a  wagon  might  be  useful  and  necessary  for  the  use  of  the 
agent  of  the  company,  in  conducting  the  undoubted  business  of 
the  corporation — the  building  and  maintaining  the  road. 

We  are  unable  to  assent  to  the  position  taken  in  the  argument, 
that  a  ratification  of  part  is  a  ratification  of  the  whole  contract. 
While  the  corporation  may  be  restricted  from  ratifying  a  con- 
tract beyond  the  scope  of  the  objects  of  the  corporation,  there 
could  be  no  such  objection  as  to  any  matter  clearly  within  their 
power.  The  other  contracting  party  might  have  a  right  to  reject 
such  ratification,  claiming  that  the  contract  is  entire,  and  if  not 
ratified  as  such,  it  should  not  be  made  good  for  a  part  only.  But 
if  they  claim  the  benefit  of  the  partial  ratification,  the  corporation 
can  hardly  object. 


PEOPLE  EX  REL.  TIFFANY  &  CO.  v.  CAMPBELL. 
1894.  144  N.  Y.  166,  38  N.  E.  990. 

ANDREWS,  Ch.  J. :  This  appeal  is  from  an  order  of  the 
General  Term  dismissing  a  writ  of  certiorari  to  review  a  decision 
of  the  state  comptroller  subjecting  to  taxation  a  portion  of  the 
relator's  capital  employed  in  this  state  in  the  years  1889,  1890  and 
1891. 

The  relator  is  a  manufacturing  corporation  in  this  state,  organ- 
ized under  the  general  law  for  the  incorporation  of  manufacturing 
companies,  for  the  manufacture  and  sale  of  gold  and  silverware 
and  other  articles  of  ornament  and  use.  Its  capital,  stated  in  the 
certificate,  is  $2,400,000,  which  by  accretion  now  exceeds  $3,000,- 
000.  It  has  a  store  for  the  sale  of  its  products  in  the  city  of 
New  York.  It  employs  from  six  to  eight  hundred  men  in  its 
manufacturing  business  in  this  state  and  about  eighty  per  cent, 
of  its  capital.  All  of  this  capital,  except  a  portion  varying  in 
different  years  from  twelve  to  fifteen  per  cent,  is  invested  in  its 
manufacturing  business.     The  portion  not  employed  in  that  way, 


PEOPLE   EX    REL,   TIFFANY   &   CO.    V.    CAMPBELL.  II/ 

amounting  on  the  average  to  about  $300,000  a  year,  is  employed 
in  the  purchase  and  sale  of  goods,  principally  of  foreign  manu- 
facture, of  the  same  general  character  as  the  goods  manufac- 
tured by  the  relator,  but  of  a  cheaper  description,  which  it  cannot 
itself  advantageously  manufacture,  but  which  are  necessary  in 
order  to  make  its  stock  complete,  and  to  meet  the  wants  of  cus- 
tomers. The  portion  of  the  relator's  capital  not  employed  in  this 
state,  being  about  twenty  per  cent,  thereof,  is  invested  perma- 
nently in  London  and  Paris,  and  a  small  part  in  New  Jersey. 

The  question  presented  relates  to  the  rule  of  taxation  as  ap- 
plied to  the  relator  and  the  basis  upon  which  the  tax  is  to  be 
computed,  assuming  that  to  any  extent  the  capital  of  the  relator 
is  taxable. 

The  relator  insists  that,  being  a  manufacturing  corporation,  it 
was  exempted  from  taxation  by  section  3  of  chap.  542  of  the 
laws  of  1880,  which  exempted  "manufacturing  corporations  car- 
rj'ing  on  manufacture  within  this  state,"  and  the  further  claim 
is  made  in  behalf  of  the  relator  that  the  amendment  of  that  sec- 
tion by  chap.  193  of  the  laws  of  1889.  which  inserted  the  words 
"wholly  engaged  in"  before  the  words  "carrying  on  manufac- 
ture," contained  in  the  act  of  1880,  was  not  intended  to  and  did 
not  aflfect  or  qualify  the  exemption  given  by  the  prior  act.  and 
that  by  that  act  a  manufacturing  corporation  was  absolutely  ex- 
empt from  taxation  in  whatever  other  business  it  might  be  en- 
gaged. The  comptroller,  in  settling  the  tax,  while  expressing  a 
doubt  whether  the  relator's  business  within  this  state  was  not 
whollv  that  of  manufacture  within  the  fair  meaning  of  the  act  of 
1889,  nevertheless  concluded  that  it  was  taxable  on  the  portion  of 
its  capital  employed  in  this  state  in  the  purchase  or  sale  of  goods 
manufactured  by  other  parties,  and  upon  this  basis  adjusted  the 
tax.  The  attorney-general  claims  that  the  comptroller  erred  in 
limiting  the  tax  to  the  portion  of  the  relator's  capital  employed 
in  a  business  outside  of  the  manufacture  and  sale  of  its  own 
products,  and  that  by  uniting  therewith  the  business  of  buying 
and  selling  other  articles,  although  of  the  same  general  character, 
was  not  entitled  to  any  exemption  because  not  "wholly  engaged" 
in  carrying  on  manufacture  within  the  state,  which,  it  is  insisted, 
is  the  condition  of  exemption  of  manufacturing  corporations,  im- 
posed by  the  act  of  1889. 

We  do  not  assent  to  the  claim  of  the  relator's  counsel  that  the 
words  "wholly  engaged  in,"  contained  in  the  amendment  of  18S9, 
do  not  apply  to  manufacturing  corporations.  The  plain  object  of 
the  exemption  of  manufacturing  corporations  carrying  on  manu- 
facturing within  this  state,  from  taxation,  by  the  act  of  1880,  was 
the  encouragement  of  production,  and  it  was  assumed  that  the 
employment  of  capital  and  labor  in  the  business  of  manufacture 
here  was  a  just  ground  for  the  exemption.  The  object  of  the 
amendment  of  1889  was  not  to  withdraw  the  protection  given  by 
the  act  of  1880,  but  to  define  more  specifically  than  in  the  prior 


Il8    *  POWERS. 

act,  the  purpose  that  the  exemption  should  be  confined  to  corpo- 
rations whose  corporate  business  was  exclusively  that  of  manu- 
facture. Under  the  broad  language  of  our  statutes  authorizing 
incorporations  and  the  provisions  of  special  charters,  the  corpo- 
ration powers  may  be  extended  to  embrace  many  objects  dissim- 
ilar in  character  and  not  germane  to  each  other.  It  was  to  avoid 
a  construction  which  would  enable  parties  to  organize  a  corpora- 
tion, naming  manufacture  as  one  of  its  objects,  for  the  purpose 
of  escaping  taxation,  while  in  fact  that  purpose  might  be  a  mere 
cover  for  the  other  corporate  enterprises  embraced  in  the  same 
certificate,  not  within  the  policy  of  the  legislation  exempting  man- 
ufacturing corporations  from  taxation.  The  words  in  the  amend- 
ment of  1889  were  inserted  to  prevent  this  evasion  of  the  statute. 

It  is  claimed  that  the  purchase  and  sale  of  goods  not  manufac- 
tured by  the  relator,  merely  to  complete  its  stock,  and  limited 
to  articles  which  it  could  not  advantageously  manufacture  itself, 
was  incidental  and  subsidiary  to  the  exercise  of  its  corporate 
power  as  a  manufacturing  company,  and,  therefore,  within  the 
power  granted.  It  is  well  settled  that  a  corporation  possesses  not 
only  powers  specifically  granted  in  terms,  but  "as  expressed  in 
the  Revised  Statutes"  such  powers  "as  shall  be  necessary  to  the 
exercise  of  the  powers  so  enumerated  and  given."  (i  Rev.  St. 
600,  3.)  The  unexpressed  and  incidental  powers  possessed  by 
a  corporation  are  not  limited  to  such  as  are  absolutely  or  in- 
dispensably necessary  to  enable  it  to  exercise  the  powers  specifi- 
cally granted.  Whatever  incidental  powers  are  reasonably  nec- 
essary to  enable  it  to  perform  its  corporate  functions  are  implied 
from  the  powers  affirmatively  granted.  (Comstock,  J.,  Curtis 
V.  Leavitt,  15  N.  Y.  64.)  But  powers  merely  convenient  or  use- 
ful are  not  implied  if  they  are  not  essential,  having  in  view  the 
nature  and  object  of  the  incorporation.  The  power  assumed  by 
the  relator  in  this  case  to  supply  from  other  sources  goods  which 
it  could  not  itself  profitably  manufacture,  was  a  convenient  and 
useful  one,  and  doubtless  contributed  to  the  success  of  its  general 
business,  but  it  cannot,  we  think,  be  said  to  be  essential  to  its 
business  as  a  manufacturing  corporation.  The  power  to  sell  its 
products,  even  if  it  had  not  as  in  this  case  been  expressly  in- 
cluded among  the  enumerated  powers,  would  be  necessarily  im- 
plied in  the  charter  of  a  manufacturing  corporation.  Without 
the  power  of  sale  the  business  of  production  could  not  be  carried 
on.  The  power  to  sell  is  an  indispensable  adjunct  to  a  manufac- 
turing business.  But  the  same  considerations  do  not  apply  where 
a  manufacturing  corporation  is  also  engaged  in  the  purchase  and 
sale  of  goods  manufactured  by  other  parties.  This  part  of  the 
relator's  business  was  not,  we  think,  within  its  chartered  powers. 

The  question,  therefore,  arises  whether,  by  engaging  in  this 
business,  under  the  circumstances  and  for  the  reasons  disclosed 
by  the  evidence,  the  relator,  whose  main  and  important  business 
was  the  manufacture  and  sale  of  its  own  products,  lost  the  benefit 


PEOPI.E    EX    REL.    TIFFANY    &    CO.    V.    CAMPBELL.  1 19 

of  the  exemption  given  by  the  act  of  1889,  to  manufacturing  cor- 
porations within  this  state,  "wholly  engaged  in  carrying  on  man- 
ufacture." The  corporate  business  of  the  relator  was  the  manu- 
facture of  goods  and  the  same  of  its  manufactured  products. 
This  is  the  clear  construction  of  its  certificate.  It  employed  a 
small  portion  of  its  capital  in  doing  a  business  not  strictly  author- 
ized by  its  charter,  viz.,  the  buying  and  selling  of  goods  manu- 
factured by  other  persons.  The  state  could  have  intervened  to 
prevent  this  usurpation  of  power  if,  in  the  opinion  of  the  au- 
thorities, the  public  interests  required  it.  The  statute  of  1889, 
in  exempting  from  taxation  manufacturing  corporations  "wholly 
engaged  in  carrying  on  manufacture"  within  this  state,  had  in 
view  corporations  whose  corporate  powers  were  confined  to  the 
exclusive  business  of  manufacturing,  and  the  limiting  words  were 
intended  to  distinguish  between  such  corporations  and  corpora- 
tions which  embrace  a  wider  scope  of  power,  but  which  included 
the  power  to  engage  in  the  business  of  manufacture.  These  latter 
corporations  were  not  exempted  unless,  indeed,  their  actual  busi- 
ness was  confined  to  the  exercise  of  this  specific  power.  The 
statute  was  not  aimed  at  and  did  not  contemplate  the  exercise  by 
a  corporation  of  powers  ultra  vires.  If  a  manufacturing  corpora- 
tion is  engaged  in  business  outside  of  its  corporate  business,  it 
does  not  cease  to  be  "wholly  engaged"  in  the  business  of  manu- 
facture; that  is  to  say,  its  only  legal  and  authorized  business  was 
that_  of  manufacture.  It  subjected  itself  to  taxation  upon  that 
portion  of  its  capital  so  used,  but  nevertheless  it  remained  a  cor- 
poration which,  so  far  as  it  exercised  its  legal  powers,  was 
"wholly  engaged"  in  manufacture,  and,  therefore,  entitled  to  ex- 
emption as  to  its  manufacturing  business. 

_  The  conclusion  reached  by  the  comptroller  worked  exact  jus- 
tice. It  exempted  the  relator  as  a  manufacturing  corporation 
from  taxation.  It  imposed  a  tax  on  its  capital  employed  in  out- 
side and  unauthorized  transactions.  The  relator  cannot  be  heard 
to  complain  of  taxation  to  this  extent,  or  that  it  was  not  capital 
taxable  under  the  law  of  1889.  The  apportionment  of  a  tax 
under  circumstances,  in  many  respects,  similar  to  this  had  been 
sustained  by  the  courts  of  Pennsylvania.  (Com.  v.  Lackawanna 
Co.,  129  Pa.  St.  346;  Com.  v.  Wm.  Mann  Co..  150  id.  64.)  The 
case  is  not  free  from  difficulty.  But  it  is  to  be  borne  in  mind 
that  very  few  corporations  would  be  entitled  to  exemption  if  the 
exemption  was  lost  by  proof  that  the  corporation  had  done  some 
business  not  within  its  corporate  powers.  The  rule  we  adopt 
maintains  the  policy  of  the  statute,  while  it  subjects  all  the  prop- 
erty of  the  corporation,  outside  of  its  legitimate  business,  to 
taxation. 

The  order  below  should  be  affirmed. 

All  concur,  except  Bartlett,  J.,  not  voting. 

Order  affirmed. 


I20  POWERS. 

QUACKENBOSS  v.  GLOBE  &  RUTGERS  FIRE  INS.  CO. 

1903.     177  N.  Y.  71,  69  N.  E.  223. 

Corporate  Seal. 

Appeal  from  a  judgment  of  the  Appellate  Division  of  the  Su- 
preme Court  in  the  first  judicial  department,  entered  December 
26,  1902,  affirming  a  judgment  in  favor  of  defendant  entered  upon 
a  dismissal  of  the  complaint  by  the  court  at  a  trial  term. 

This  action  was  brought  to  recover  damages  for  the  breach  of 
an  alleged  contract  between  the  plaintiff  and  the  Rutgers  Fire  In- 
surance Company,  which  company  was  subsequently  consolidated 
with  the  Globe  Insurance  Company  and  the  obligations  of  the 
former  assumed  by  the  defendant. 

MARTIN,  J. :  On  the  trial  the  plaintiff,  after  proving  that  the 
contract  upon  which  the  action  was  based  was  signed  by  the 
president  and  secretary  of  the  Rutgers  Insurance  Company,  for 
whose  debts  and  obligations  the  defendant  was  liable,  and  that  the 
corporate  seal  of  the  company  was  affixed  thereto,  offered  it  in 
evidence.  It  was  rejected  and  the  plaintiff  excepted.  We  think 
the  exception  was  well  taken  and  constituted  error  which  requires 
a  reversal. 

It  is  an  ancient  and  well-established  rule  of  law  that  where  the 
seal  of  a  corporation  is  affixed  to  a  contract  or  written  instru- 
ment, to  which  such  corporation  is  a  party,  and  it  is  signed  by 
the  president  and  secretary  or  other  proper  officers,  it  will  be 
presumed  that  such  officers  did  not  exceed  their  powers,  as  the 
seal  is  prima  facie  proof  that  it  was  attached  by  proper  authority, 
and  it  lies  with  the  party  objecting  to  its  executing  to  show  that 
it  was  affixed  surreptitiously  or  improperly.  (Whitney  v.  Union 
Trust  Co.  of  New  York,  65  N.  Y.  576;  Trustees  of  Canandarqua 
Academy  v.  McKechnie,  90  N.  Y.  618;  Jourdan  v.  Long  Island 
R.  R.  Co.,  115  N.  Y.  380,  384;  Lovett  v.  Steam  Saw  Mill  Ass'n, 
6  Paige,  Ch.  54,  60.) 

It  is  manifest  that  there  was  no  sufficient  proof  overcoming  the 
presumption  arising  from  the  execution  of  the  contract  in  question 
to  justify  the  court  in  excluding  it.  Whatever  proof  was  given  as 
to  the  regularity  of  the  contract  bore  not  upon  its  admissibility, 
but  upon  its  effect  when  received.  The  court  could  not  improp- 
erly exclude  the  plaintiff's  most  material  and  important  evidence, 
indeed,  that  which  was  the  very  basis  of  his  action,  and  then, 
because  he  had  not  made  sufficient  proof  to  sustain  his  complaint, 
hold  that  the  erroneous  ruling  should  be  disregarded.  Such  a 
claim  finds  no  justification  in  law.  When  the  plaintiff  was  re- 
fused his  legal  right  to  have  the  contract  admitted,  he  was  not 
required,  nor  would  he  be  expected,  to  introduce  other  proof  to 
establish  his  cause  of  action. 


JACKSONVILLE,    ETC.,    RY.    &    NAVIGATION    CO.    V.    HOOPER.       121 

The  judgment  should  be  reversed  and  a  new  trial  ordered,  with 
costs  to  abide  the  event. 

Parker,  Ch.  J.,  Gray,  Bartlett  and  Cullen,  JJ.,  concur;  O'Brien, 
J.,  dissents;  Haight,  J.,  absent. 

Judgment  reversed,  etc. 


JACKSONVILLE,   ETC.,   RAILWAY   &   NAVIGATION    CO. 

V.   HOOPER. 

1895.     160  U.  S.  514,  40  L.  ed.   515,   16  Sup.  Ct.  379. 

Incidental  Pozvcrs. 

In  the  Circuit  Court  of  the  United  States  for  the  northern  dis- 
trict of  Florida,  on  the  4th  day  of  December,  1889,  Mary  J. 
Hooper,  Henry  H.  Hooper,  her  husband,  and  William  F.  Porter, 
for  the  use  of  said  Mary  J.  Hooper,  citizens  of  the  state  of  Ohio, 
brought  an  action  against  the  Jacksonville,  Mayport,  Pablo  Rail- 
way and  Navigation  Company,  a  corporation  of  the  state  of  Flor- 
ida. The  plaintiffs'  amended  declaration  set  up  causes  of  action 
arising  out  of  the  covenants  contained  in  a  certain  indenture  of 
lease  between  the  parties.  This  lease,  dated  July  10,  1888,  pur- 
ported to  grant,  for  a  term  of  two  years,  certain  lots  of  land 
situated  at  a  place  called  "Burnside,"  in  Duval  County,  Florida, 
whereon  was  erected  a  hotel  known  as  "San  Diego  Hotel."  In 
consideration  of  this  grant  the  railroad  company  agreed  to  pay 
in  monthly  instalments  a  yearly  rent  of  $800,  and  to  keep  the 
premises  insured  in  the  sum  of  $6,000. 

It  was  alleged  that  on  November  28,  1889,  during  said  term, 
and  while  the  railway  company  was  in  possession,  the  hotel  and 
other  buildings  were  wholly  destroyed  by  fire;  that  the  defendant 
had  failed  and  neglected  to  have  the  same  insured,  and  that  there 
was  an  arrearage  of  rent  due  amounting  to  the  sum  of  $106.67. 
For  the  amount  of  the  loss  occasioned  by  the  absence  of  insurance 
and  for  the  back  rent  the  action  was  brought. 

The  defendant  denied  that  the  railway  company  had  duly  exe- 
cuted the  instrument  sued  on ;  denied  that  Alexander  Wallace,  the 
president  of  the  company,  and  who  had  executed  the  lease  as  such 
president,  had  any  authority  from  the  company  so  to  do.  The 
defendant  also  alleged  that  such  a  lease,  even  if  formally  executed, 
was  ultra  vires ;  also  that  the  covenant  to  insure  was  an  impossi- 
ble covenant,  as  shown  by  ineffectual  efforts  to  secure  such  insur- 
ance. 

The  case  was  tried  in  April,  1891,  and  resulted  in  a  verdict  and 
judgment  against   the  defendants   in   the   sum  of  $6,798.70.     On 


122  POWERS. 

errors  assigned  to  certain  rulings  of  the  court  and  in  the  charge 
to  the  jury  the  case  was  brought  to  this  court, 

SHIRAS,  J.  *  *  *  It  is,  however,  further  claimed  that  the 
contract  sued  on  was  not  within  the  legitimate  powers  of  the  com- 
pany. 

This  is  not  a  case  in  which,  either  by  its  charter,  or  by  some 
statute  binding  upon  it,  the  company  is  forbidden  to  make  such  a 
contract.  Indeed,  the  public  laws  of  Florida,  referring  to  the 
powers  of  railroad  companies,  provide  that  every  such  corporation 
shall  be  empowered  "to  purchase,  hold  and  use  all  such  real  estate 
and  other  property  as  may  be  necessary  for  the  construction  and 
maintenance  of  its  road  and  canal  and  the  stations  and  other  ac- 
commodations necessary  to  accomplish  the  objects  of  its  incorpora- 
tion, and  to  sell,  lease,  or  buy  any  land  or  real  estate  not  neces- 
sary for  its  use."  McClell.  Digest  of  the  Laws  of  Florida,  page 
276,  section  10.  They  are  likewise  authorized  "to  erect  and  main- 
tain all  convenient  buildings,  wharves,  docks,  stations,  fixtures, 
and  machinery  for  the  accommodation  and  use  of  their  passenger 
and   freight  business." 

Although  the  contract  power  of  railroad  companies  is  to  be 
deemed  restricted  to  the  general  purposes  for  which  they  are  de- 
signed, yet  there  are  many  transactions  which  are  incidental  or 
auxiliary  to  its  main  business,  or  which  may  become  useful  in 
the  care  and  management  of  the  property  which  it  is  authorized 
to  hold,  and  in  the  safety  and  comfort  of  the  passengers  whom 
it  is  its  duty  to  transport. 

Courts  may  be  permitted,  where  there  is  no  legislative  prohibi- 
tion shown,  to  put  a  favorable  construction  upon  such  exercise  of 
power  by  a  railroad  company  as  is  suitable  to  promote  the  success 
of  the  company,  within  its  chartered  powers,  and  to  contribute  to 
the  comfort  of  those  who  travel  thereon.  To  lease  and  maintain 
a  summer  hotel  at  the  seaside  terminus  of  a  railroad  might  obvi- 
ously increase  the  business  of  the  company  and  the  comfort  of 
its  passengers,  and  be  within  the  provisions  of  the  statute  of 
Florida  above  cited,  whereby  a  railroad  company  is  authorized 
"to  sell,  lease,  or  buy  any  land  or  real  estate  not  necessary  for  its 
use,"  and  to  "erect  and  maintain  all  convenient  buildings  *  *  * 
for  the  accommodation  and  use  of  their  passengers." 

Courts  may  well  be  astute  in  dealing  with  efforts  of  corpora- 
tions to  usurp  powers  not  granted  them,  or  to  stretch  their  lawful 
franchise  against  the  interests  of  the  public.  Nor  would  we  be 
understood  to  hold  that,  in  a  clear  case  of  the  exercise  of  a  power 
forbidden  by  its  charter,  or  contrary  to  public  policy,  a  railroad 
company  would  be  estopped  to  decline  to  be  bound  by  its  own 
act,  even  when  fulfilled  by  the  other  contracting  party.  Davis  v. 
Old  Colony  Railroad  Co.,  131  Mass.  258;  Thomas  v.  Railroad 
Co.,  loi  U.  S.  71 ;  Central  Transportation  Co.  v.  Pullman's  Car 
Co.,  139  U.  S.  24.     So,  too,  it  must  be  regarded  as  well  settled. 


JACKSONVILLE,    ETC.,    RY.    &    NAVIGATION    CO.    V.    HOOPER.       1 23 

on  the  soundest  principles  of  public  policy,  that  a  contract,  by 
which  a  railroad  company  seeks  to  render  itself  incapable  of  per- 
forming its  duties  to  the  public,  or  attempts  to  absolve  itself  from 
its  obligation  without  the  consent  of  the  state,  is  void  and  cannot 
be  rendered  enforceable  by  the  doctrines  of  estoppel.  The  New 
York  &  Maryland  Railroad  Co.  v.  Winans,  17  How.  30;  Thomas 
V.  Railroad  Co.,  loi  U.  S.  71;  Central  Transportation  Co.  v. 
Pullman's  Car  Co.,  139  U,  S.  24. 

We  do  not  seek  to  relax  but  rather  to  affirm  the  rule  laid  down 
by  this  court,  in  Central  Transportation  Co.  v.  Pullman's  Car 
Company  (above  cited),  that  "a  contract  of  a  corporation,  which 
is  ultra  vires,  in  the  proper  sense,  that  is  to  say,  outside  the  ob- 
ject of  its  creation  as  defined  in  the  law  of  its  organization,  and, 
therefore,  beyond  the  powers  conferred  upon  it  by  the  legislature, 
is  not  voidable  only,  but  wholly  void,  and  of  no  legal  effect — 
the  objection  to  the  contract  is  not  merely  that  the  corporation 
ought  not  to  have  made  it,  but  that  it  could  not  make  it.  Such  a 
contract  cannot  be  ratified  by  either  party,  because  it  could  not 
have  been  authorized  by  either.  No  performance  on  either  side 
can  give  the  unlawful  contract  any  validity,  or  be  the  foundation 
of  any  right  of  action  upon  it."     139  U.  S.  59,  60. 

But  we  think  the  present  case  falls  within  the  language  of  Lord 
Chancellor  Selbourne,  in  Attorney-General  v.  Great  Eastern 
Railway,  5  App.  Cas.  473,  578,  where  while  declaring  his  sense 
of  the  importance  of  the  doctrine  of  ultra  vires,  he  said:  "This 
doctrine  ought  to  be  reasonably,  and  not  unreasonably,  understood 
and  applied,  and  that  whatever  may  fairly  be  regarded  as  inci- 
dental to,  or  consequential  upon,  those  things  which  the  legislature 
has  authorized,  ought  not,  unless  expressly  prohibited,  to  be  held, 
by  judicial  construction,  to  be  ultra  vires."  In  the  application  of 
the  doctrine  the  court  must  be  influenced  somewhat  by  the  special 
circumstances  of  the  case.  As  was  said  by  Romilly,  M.  R.,  in 
Lyde^  v.  Eastern  Bengal  Railroad,  36  Beav.  10,  where  was  in 
question  the  validity  of  a  contract  by  a  railway  company  to  work 
a  coal  mine:  "The  answer  to  this  argument  appears  to  me  to 
depend  upon  the  facts  of  each  particular  case.  If,  in  truth,  the 
real  object  of  the  colliery  was  to  supply  the  railway  with  cheaper 
coals,  it  would  be  proper  to  allow  the  accidental  additional  profit 
of  selling  coal  to  others ;  but  if  the  principal  object  of  the  colliery 
was  to  undertake  the  business  of  raising  and  selling  coals,  then 
it  would  be  a  perversion  of  the  fimds  of  the  companv.  and  a 
scheme  which  ought  not  to  be  permitted,  however  profitable  it 
might  appear  to  be.  The  prohibition  or  permission  to  carry  on 
this  trade  would  depend  on  the  conclusions  which  the  court  drew 
from  the  evidence." 

_  The  principle  upon  which  we  may  safely  rule  the  present  ques- 
tion is  within  the  case  of  Brown  v.  Winnisimmet  Company,  ir 
Allen,  326,  334.  There  a  contract,  made  by  the  treasurer  of  a 
ferry  company,  to  lease  one  of  the  company's  boats  for  a  certain 


124  POWERS. 

money  consideration,  was  alleged  to  be  void  for  want  of  antece- 
dent authority  given  by  the  company  to  the  treasurer,  and  also 
because  such  a  contract  was  not  made  in  the  legitimate  exercise 
of  the  company's  powers.  On  the  first  point  it  was  ruled  that, 
from  evidence  showing  ratification  by  the  company,  it  was  proper 
for  the  jury  to  infer  that  the  treasurer  had  been  duly  authorized 
to  make  the  contract,  and,  disposing  of  the  second  question,  the 
court,  through  Chief  Justice  Bigelow,  said:  "We  know  of  no 
rule  or  principle  by  which  an  act,  creating  a  corporation  for  cer- 
tain specific  objects,  or  to  carry  on  a  particular  trade  or  business, 
is  to  be  strictly  construed  as  prohibitory  of  all  other  dealings  or 
transactions  not  coming  within  the  exact  scope  of  those  desig- 
nated. Undoubtedly  the  main  business  of  a  corporation  is  to  be 
confined  to  that  class  of  operations  which  properly  appertain  to 
the  general  purposes  for  which  its  charter  was  granted.  But  it 
may  also  enter  into  and  engage  in  transactions  which  are  incidental 
or  auxiliary  to  its  main  business,  which  may  become  necessary, 
expedient,  or  profitable  in  the  care  and  management  of  the  prop- 
erty which  it  is  authorized  to  hold  under  the  act  by  which  it  was 
created."  See  also,  Davis  v.  Old  Colony  Railroad,  131  Mass. 
258,  272. 

The  contract  between  the  parties  hereto  was  for  leasing  a  hotel 
at  the  terminus  of  the  railroad,  situated  at  a  beach,  distant  from 
any  town.  If  not  fairly  within  the  authority  granted  by  the  stat- 
ute of  Florida  "to  erect  and  maintain  all  convenient  buildings 
*  *  *  for  the  accommodation  and  use  of  their  passengers,"  it 
certainly  cannot  be  said  to  have  been  forbidden  by  such  laws. 
Nor  can  it  be  said  to  have  been,  in  its  nature,  contrary  to  public 
policy. 

To  maintain  cheap  hotels  or  eating  houses,  at  stated  points  on 
a  long  line  of  railroad  through  a  wilderness,  as  in  the  case  of  the 
Pacific  railroads,  or  at  the  end  of  a  railroad  on  a  barren,  unsettled 
beach,  as  in  the  present  case,  not  for  the  purpose  of  making  money 
out  of  such  business,  but  to  furnish  reasonable  and  necessary  ac- 
commodations to  its  passengers  and  employes,  would  not  be  so 
plainly  an  act  outside  of  the  powers  of  a  railroad  company  as  to 
compel  a  court  to  sustain  the  defense  of  ultra  vires,  as  against  the 
other  party  to  such  a  contract. 

But  even  if  the  railroad  company  might  be  answerable  for  the 
rent  of  the  premises,  it  is  contended  that  the  covenant  to  procure 
insurance  was  so  far  outside  of  the  company's  powers  as  not  to 
be  enforceable. 

No  one  could  deny  that  it  would  not  be  competent  for  a  rail- 
road company,  without  the  authority  of  the  legislature,  to  carry 
on  an  insurance  business.  But  this  covenant  to  keep  the  premises 
insured  is  correlative  to  the  obligation  of  the  lessors  to  rebuild 
in  case  the  hotel  should  be  destroyed  by  fire,  and  to  the  provision 
that,  in  such  an  event,  the  rents  should  cease  until  the  hotel 
should  be  put   in   habitable   condition   and   repair  by   the   lessors. 


NICOLL   V.    NEW    YORK    &   E,    R.   R.    CO.  I25 

Such  mutual  covenants  are  quite  usual  in  leases  of  this  kind, 
and  are  merely  incidental  to  the  principal  purpose  of  the  con- 
tract.    *     *     * 

Judgment  affirmed,^ 


NICOLL  V.  NEW  YORK  &  E.  R.  R.   CO.^ 

1854.     12  N.  Y.  121. 

Power  to  Acquire  and  Convey  Real  Estate. 

Ejectment  commenced  in  the  supreme  court  in  February,  1847, 
and  tried  at  the  Orange  county  circuit,  held  by  Mr.  Justice  Ed- 
wards in  October,  1848.  The  jury  found  a  special  verdict,  from 
which  it  appeared  that  on  the  first  day  of  July,  1836,  Nicholas 
A.  Dederer,  being  the  owner  in  fee  simple  of  a  farm  situate  in 
Blooming  Grove,  Orange  county,  executed  to  the  Hudson  and 
Delaware  Railroad  Company  a  deed,  dated  that  day,  whereby,  in 
consideration  of  the  benefits  and  advantages  to  him  of  the  rail- 
road proposed  to  be  made  by  the  company,  and  of  one  dollar  to 
him  paid  by  the  company,  he  granted  to  such  company  the  privi- 
lege of  surveying  and  laying  out  by  its  agents  and  engineers, 
through  his  farm  or  tract  of  land,  the  route  and  site  of  its  road ; 
and  also  granted,  bargained,  sold,  and  conveyed  unto  the  com- 
pany and  its  successors,  so  much  of  the  farm  as  might  be  selected 
and  laid  out  by  the  company  for  the  site  of  its  railroad,  six  rods 
in  width  across  the  farm,  provided  always,  and  such  grant  was 
made  upon  the  express  condition  that  the  company  should  con- 
struct its  railroad  within  the  time  prescribed  by  the  act  incorpo- 
rating the  same.  That  subsequently  and  before  the  27th  of 
October,  1836,  the  company  selected  and  laid  out,  for  the  site  of 
its  railroad  through  the  farm,  a  strip  of  land  six  rods  wide  ex- 
tending through  the  farm.  That  on  the  ist  of  April,  1844,  the 
farm  formerly  owned  by  Dederer,  by  virtue  of  sundry  mesne 
conveyances  became  the  property  of   the  plaintiff  in    fee   simple 

*In  Malone  v.  Lancaster  Gas,  &c.,  Co.,  182  Pa.  St.  309,  2>7  Atl.  932, 
it  was  held  that  a  corporation  organized  for  the  purpose  of  manufac- 
turing and  supplying  gas  might  lawfully  deal  in  such  appliances  and 
conveniences  as  would  induce  new  customers  to  use  gas  and  old 
customers  to  use  a  larger  quantity,  even  though  this  was  "not  within 
the  literal  terms  of  the  corporate  grant." 

See  also,  Brown  v.  Winnisimmet  Co.,  11  Allen  (Mass.)  Z26;  Powell 
V.  Murray,  3  App.  Div.  (N.  Y.)  273,  73  N.  Y.  St.  851,  38  N.  Y.  S.  233, 
affd.  137  N.  Y.  717,  53  N.  E.  1130;  Thomas  v.  Railroad  Co.,  101  U.  S. 
71,  25  L.  ed.  950.— Ed. 

*See  also.  Page  v.  Heineberg.  40  Vt.  81  (1868):  White  v.  Howard.  38 
Conn.  342  (1871);  Leazure  v.  Hillegas,  7  Serg  &  R.  313  (1821);  Hough  v. 
Land  Co..  73  111.  23  (1874);  National  Bank  v.  Matthews,  98  U.  S.  621 
(1878);  National  Bank  v.  Whitney,  103  U.  S.  99  (1880);  Case  v.  Kelly, 
133  U.  S.  21   (1890);  People  v.  La  Rue,  67  Cal.  526  (1885).— Ed. 


126  POWERS. 

subject  only  to  such  right  as  the  Hudson  and  Delaware  Railroad 
Company  then  had  to  any  portion  thereof,  sufficient  for  the  track 
of  its  road.  That  this  company,  on  the  27th  of  October,  1836, 
commenced  the  construction  of  its  railroad,  but  never  completed 
or  put  in  operation  a  double  or  single  track  or  any  part  thereof. 
That  in  pursuance  of  an  act  of  the  Legislature,  entitled  an  act 
authorizing  the  New  York  and  Erie  Railroad  Company  to  con- 
struct a  branch  road,  terminating  at  the  village  of  Newburgh, 
passed  April  8,  1845,  the  Hudson  and  Delaware  Railroad  Com- 
pany were  authorized  to,  and  on  the  14th  of  December,  1846,  did 
execute  to  the  defendant,  the  New  York  and  Erie  Railroad  Com- 
pany, a  deed,  and  thereby  for  a  valuable  consideration  granted, 
bargained,  sold,  and  conveyed  to  the  defendant  and  its  successors, 
the  maps,  charts,  drafts,  surveys,  and  other  personal  property  of 
the  Hudson  and  Delaware  Company,  and  all  its  rights,  privileges, 
immunities  and  improvements,  acquired  under  and  by  virtue  of 
the  original  act  of  incorporation  or  of  any  act  amending  it,  or  in 
any  other  manner;  and  also  all  the  grants,  lands,  and  real  estate 
acquired  by  or  ceded  or  conveyed  to  the  Hudson  and  Delaware 
Company,  and  all  its  right,  title,  and  interest  to  the  same,  and 
particularly  the  right  of  way,  granted  by  Dederer  to  the  Company 
and  its  successors,  by  the  deed  from  him  above  mentioned.  That 
when  this  suit  was  commenced  on  the  25th  of  February,  1847, 
the  defendant  had  not  completed  or  put  in  operation  its  branch 
road  terminating  at  Newburgh,  or  any  part  of  it,  nor  had  it  done 
so  when  the  cause  was  tried.  "J^hat  on  the  2d  of  December,  1846, 
the  defendant  entered  upon  the  strip  of  land  six  rods  wide,  men- 
tioned in  the  deed  from  Dederer  and  laid  out  by  the  Hudson 
and  Delaware  Company  through  his  farm,  as  the  site  of  its  road, 
and  ejected  the  plaintiff  therefrom,  and  that  the  defendant  was 
still  in  the  possession  thereof.  The  suit  was  brought  to  recover 
possession  of  this  strip  of  land  from  the  defendant. 

The  justice  before  whom  this  cause  was  tried  ordered  judgment 
upon  the  special  verdict  in  favor  of  the  plaintiff.  The  defendant 
appealed,  and  the  Supreme  Court,  sitting  in  general  term  in  the 
3d  district,  reversed  the  judgment,  and  gave  judgment  in  favor  of 
the  defendant.  (12  Barb.  460.)  The  plaintiff  appealed  to  this 
court. 

PARKER,  J. :  The  grant  from  Dederer  to  the  Hudson  and 
Delaware  Railroad  Company,  bearing  date  the  first  day  of  July. 
1836,  was  made  to  that  company  "and  their  successors."  Under 
that  grant,  there  can  be  no  doubt,  the  Hudson  and  Delaware  Rail- 
road Company  took  a  fee.  The  words  of  perpetuity  used  would 
have  been  sufficient  to  describe  a  fee,  even  under  the  most  strict 
requirements  of  the  common  law. 

The  company  had  ample  power  to  purchase  lands.  It  was  a 
power  incident  at  common  law  to  all  corporations  unless  they 
were  specially  restrained  by  their  charters  or  by  statute.     2  Kent. 


NICOLL   V.    NEW    YORK    &    i;.    K.    R.    CO.  12/ 

281;  Co.  Litt.  44a,  300b;  I  Kyd.  on  Corp.,  76,  78,  108,  115; 
3  Pick.  239.  And  in  this  case  the  power  was  expressly  conferred 
by  the  9th  section  of  the  charter  (Sess.  Laws  of  1835,  p.  113); 
and  by  the  i6th  section  there  were  given  to  it  the  general  powers 
conferred  upon  corporations  (i  R.  S.  731),  one  of  which  is  that 
of  holding,  purchasing,  and  conveying  such  real  estate  as  the  pur- 
poses of  the  corporation  may  require.  But  if  no  words  of  per- 
petuity had  been  used,  the  grantor  owning  a  fee,  the  company 
would  have  taken  a  fee,  for  the  statute  is  now  imperative  that 
every  grant  shall  pass  all  the  estate  or  interest  of  the  grantor, 
unless  the  intent  to  pass  a  less  estate  or  interest  shall  appear  by 
express  terms  or  be  necessarily  implied  in  the  terms  of  the  grant 
(I  R.  S.  748, J  I). 

But  it  is  objected  that  because  by  the  act  of  incorporation  there 
was  given  to  it  only  a  term  of  existence  of  fifty  years  (Laws  of 
1835,  p.  no,  §  i).  therefore  the  grant  shall  be  deemed  to  have 
conveyed  an  estate  for  years,  and  not  in  fee.  The  unsoundness  of 
that  position  is  easily  shown.  It  was  never  yet  held  that  the 
grant  of  a  fee  in  express  terms  could  be  restricted  by  the  fact 
that  the  grantee  had  but  a  limited  term  of  existence.  If  it  were 
so,  a  grant  could  never  be  made  to  an  individual  in  fee,  because 
in  his  earthly  existence  he  is  not  immortal.  Under  such  a  rule  a 
man  could  never  buy  a  greater  interest  in  a  farm  than  a  life 
estate.  It  would  follow  that  all  estates  would  be  life  estates  ex- 
cept those  held  by  perpetual  corporations.  The  intent  of  parties, 
fully  expressed  in  a  deed,  would  avail  nothing,  but  all  grants 
would  be  measured  by  the  mortality  of  the  grantee.  It  is  needless 
to  follow  out  the  proposition  further  to  show  its  absurdity. 

It  is  not  to  the  parties  to  a  grant,  but  to  its  terms,  that  we  look 
to  ascertain  the  character  and  extent  of  the  estate  conveyed. 
Such  was  the  rule  at  common  law,  and  is  still  by  statute,  (i  R. 
S.  748,  §  I.)  The  change  made  by  the  statute  favors  the  grantee 
where  there  are  no  express  terms  in  the  grant,  by  presviming  the 
grantor  intended  to  convey  all  his  estate. 

At  common  law  it  was  only  where  there  were  no  express  terms 
defining  the  estate  in  the  conveyance,  that  the  term  of  legal  exist- 
ence of  the  grantee  was  deemed  to  be  the  measure  of  the  interest 
intended  to  be  conveyed.  Thus,  words  of  perpetuity,  such  as 
"heirs  or  successors."  were  necessary  to  convey  a  fee.  A  grant 
to  an  individual  without  such  words  conveyed  only  a  life  estate. 
For  the  same  reason  a  grant  without  such  words  to  a  corpora- 
tion aggregate  (Viner's  Ab.,  Estate,  L.  3),  or  to  a  mayor  or 
commonalty  fib.  3).  conveyed  a  fee,  because  the  grantees  were 
perpetual.  The  grantee  named  in  such  case  having  a  perpetual 
existence,  the  estate  could  not  have  been  enlarged  by  words  of 
succession. 

But  this  is  now  changed  by  our  Revised  Statutes.  Words  of 
inheritance  or  succession  are  no  longer  necessary,  and  in  their 
absence  we  look  not  to  the  terms  of  existence  of  the  grantee  to 


128  POWERS. 

ascertain  the  estate,  but  to  the  amount  of  interest  owned  by  the 
grantor  at  the  time  he  conveyed.  All  this  estate  is  deemed  to 
have  passed  by  the  grant,     (i  R.  S.  748,  §1.) 

All  this  is  applicable  only  to  cases  where  the  grant  is  silent  as 
to  the  extent  of  interest  conveyed.  Where  that  interest  is  ex- 
pressly described,  as  in  this  case,  the  law  never,  either  before  or 
since  our  revision,  did  violence  to  the  intent  of  the  parties,  by 
cutting  down  the  estate  agreed  to  be  conveyed  to  the  measure  of 
the  grantee's  term  of  existence.  It  has  long  been  one  of  the 
maxims  of  the  law  that  ''no  implication  shall  be  allowed  against 
an  express  estate  limited  by  express  words."  Viner's  Ab.  Impli- 
cation, A.  5;  I  Salk.  236. 

It  is  erroneous  to  say  that  an  estate  in  fee  cannot  be  fully  en- 
joyed by  a  natural  person,  or  by  a  corporation  of  limited  duration. 
It  is  an  enjoyment  of  the  fee  to  possess  it  and  to  have  the  full 
control  of  it,  including  the  power  of  alienation,  by  which  its  full 
value  may  at  once  be  realized. 

It  is  well  settled  that  corporations,  though  limited  in  their  dura- 
tion, may  purchase  and  hold  a  fee,  and  they  may  sell  such  real 
estate  whenever  they  shall  find  it  no  longer  necessary  or  conven- 
ient (s  Denio,  389).  2  Preston  on  Estates,  50.  Kent  says:  "Cor- 
porations have  a  fee  simple  for  the  purpose  of  alienation,  but  they 
have  only  a  determinable  fee  for  the  purpose  of  enjoyment.  On 
the  dissolution  of  the  corporation  the  reverter  is  to  the  original 
grantor  or  his  heirs ;  but  the  grantor  will  be  excluded  by  the 
alienation  in  fee,  and  in  that  way  the  corporation  may  defeat  the 
possibility  of  a  reverter,"  2  Kent,  282;  5  Denio,  389;  i  Comst. 
R.  509.  Large  sums  of  money  are  accordingly  expended  by  rail- 
road companies  in  erecting  extensive  station  houses  and  depots, 
and  by  banking  corporations  in  erecting  banking  houses,  because, 
holding  the  land  in  fee,  they  may  be  able  to  reimburse  themselves 
for  the  outlay  by  selling  the  fee  before  the  termination  of  their 
corporate  existence.     *     *     * 

Upon  the  whole,  my  conclusion  in  this  case  is  that  the  Hudson 
and  Delaware  Railroad  Company  took  from  Dederer  a  fee  upon 
condition  subsequent ;  that  at  the  time  of  the  conveyance  by 
Dederer  to  the  plaintifif,  there  had  been  no  forfeiture ;  and  that 
Dederer  had,  at  the  time  of  such  conveyance,  no  assignable  inter- 
est in  the  premises. 

The  judgment  of  the  Supreme  Court  should  be  affirmed. 


BRADRURY   V.    BOSTON    CANOE   CLUB.  I29 

'  BRADBURY  v.  BOSTON  CANOE  CLUB. 
1891.     153  Mass.  jj,  26  N.  E.  132. 
Power  to  Borrow  Money. 

HOLMES,  J. :  This  is  an  action  upon  a  promissory  note  for 
one  hundred  and  fifty  dollars  and  interest,  given  by  the  defendant 
to  the  plaintiff  for  money  lent  to  it  by  the  plaintiff  to  be  used  in 
building  a  club-house.  There  is  a  second  count  for  money  lent. 
At  a  meeting,  duly  called,  the  corporation  passed  a  vote  author- 
izing its  treasurer  to  borrow  money  in  terms  sufficiently  broad  to 
cover  the  loan  in  question.  The  suggestion  that  no  sufficient  no- 
tice of  the  business  to  be  transacted  was  given,  does  not  seem  to 
us  fairly  open  on  the  agreed  facts.  Moreover,  it  would  be  im- 
possible to  argue  that  the  defendant  had  not  recognized  and 
ratified  the  act  of  its  treasurer  in  borrowing  from  the  plaintiff. 
The  money  was  received  by  the  corporation,  and  was  used  by  it 
for  the  purpose  mentioned.  The  only  question  for  us  is,  whether 
the  corporation  acted  illegally  in  borrowing  money  for  the  pur- 
pose of  erecting  a  club-house  upon  land  of  which  it  held  a  lease. 

The  defendant  is  a  corporation  formed  under  the  Pub.  Sts.  c. 
115,  §  2,  for  encouraging  athletic  exercises.  By  §  7  it  "may 
hold  real  and  personal  estate,  and  may  hire,  purchase,  or  erect 
suitable  buildings  for  its  accommodation,  to  an  amount  not  exceed- 
ing five  hundred  thousand  dollars,"  etc.  We  are  of  opinion  that 
under  these  words  the  defendant  had  power  to  take  a  lease  of 
land  and  to  erect  a  suitable  club-house  upon  it.  Having  this 
power,  it  was  entitled  to  raise  money  for-  the  purpose.  No  argu- 
ment is  needed  to  show  that  the  power  at  the  end  of  §  7,  to  re- 
ceive and  hold  in  trust  funds  received  by  gift  or  bequest,  does 
not  confine  the  corporations  to  that  mode  of  raising  it.  Borrow- 
ing money  is  a  usual  and  proper  means  of  accomplishing  what 
the  statute  expressly  permits.  See  Fay  v.  Noble,  12  Cush.  i,  18; 
Morville  v.  American  Tract  Society,  123  Mass.  129,  136;  Davis 
V.  Old  Colony  Railroad,  131  Mass.  258,  271,  275.  As  this  is  a 
sufficient  reason  for  giving  the  plaintiff  judgment,  it  is  unneces- 
sary to  consider  whether  there  are  not  others. 

Judgment  for  plaintiff. 


9 — Private  Corp. 


130  POWERS. 

MONUMENT  NATIONAL  BANK  v.  GLOBE  WORKS.' 

.1869.     loi  Mass.  57,  3  Am.  Rep.  322. 
Pozver  to  make  Negotiable  Paper — Accommodation  Endorser. 

HOAR,  J. :  The  single  question  presented  for  our  decision  in 
this  cause,  all  others  which  arise  upon  the  report  having  been 
waived,  is,  whether  the  note  of  a  manufacturing  corporation,  in 
the  hands  of  a  holder  in  good  faith  for  value,  who  took  it  before 
maturity,  and  without  any  knowledge  that  the  makers  had  not 
received  the  full  consideration,  cannot  be  enforced  against  them, 
because  it  was  in  fact  made  as  an  accommodation  note. 

The  argument  for  the  defendants  takes  the  ground  that  to  issue 
an  accommodation  note  is  not  within  the  powers  conferred  upon 
the  corporation ;  and  that,  as  any  person  taking  it  had  notice  that 
it  was  the  note  of  the  corporation,  they  had  notice  that  it  was 
of  no  validity  unless  issued  for  a  purpose  within  the  scope  of  the 
corporate  powers,  and  were  therefore  bound  to  ascertain  not 
only  that  it  was  executed  by  the  officer  of  the  corporation  who 
had  the  general  authority  to  sign  the  notes  which  they  might 
lawfully  make,  but  that  the  purpose  for  which  it  was  issued 
was  such  as  the  charter  authorized  them  to  entertain  and  execute. 

The  court  are  all  of  opinion  that  this  position  is  not  tenable, 
and  that  the  defense  cannot  be  maintained. 

It  has  long  been  settled  in  this  Commonwealth  that  a  manu- 
facturing corporation  has  the  power  to  make  a  negotiable  prom- 
issory note.  Narragansett  Bank  v.  Atlantic  Silk  Co.,  3  Met.  282. 
And  it  was  held  in  Bird  v.  Daggett,  97  Mass.  494,  as  a  just  cor- 
ollary to  that  proposition,  that  such  a  note  in  the  hands  of  a 
holder  in  good  faith  for  value  is  binding  upon  the  maker,  al- 
though made  as  an  accommodation  note.  The  question  was  not 
discussed,  nor  the  reasons  for  the  decision  fully  stated,  in  Bird  v. 
Daggett;  but  it  was  assumed  that  the  doctrine  announced  was 
clear  and  undoubted  law. 

The  doctrine  of  ultra  vires  has  been  carried  much  farther  in 
England  than  the  courts  in  this  country  have  been  disposed  to 
extend  it;  but,  with  just  limitations,  the  principle  cannot  be 
questioned,  that  the  limitations  to  the  authority,  powers,  and 
liability  of  a  corporation  are  to  be  found  in  the  act  creating  it. 
And  it  no  doubt  follows  as  claimed  by  the  learned  counsel  for  the 
defendants,  that  when  powers  are  conferred  and  defined  by  stat- 
ute, everyone  dealing  with  the  corporation  is  presumed  to  know 
the  extent  of  those  powers. 

But  when  the  transaction  is  not  the  exercise  of  a  power  not 

^  See  also,  Union  Bank  v.  Jacobs,  6  Humph.  (Tenn.)  515  (1845);  Na- 
tional Park  Bank  v.  German  American  Co.,  116  N.  Y.  281  (1889).  Power 
to  accept  bill  of  exchange,  Bateman  v.  Railway  Co.,  L.  R.  1  C.  P.  499 
(1866).— Ed. 


MONUMENT    NATIONAL    BANK    V.    GLOBE    WORKS.  I3I 

conferred  on  a  corporation,  but  the  abuse  of  a  general  power  in  a 
particular  instance,  the  abuse  not  being  known  to  the  other  con- 
tracting party,  the  doctrine  of  ultra  vires  does  not  apply.  As 
was  said  by  Selden,  J.,  in  Bissell  v.  Michigan  Southern  &  North- 
ern Indiana  Railroad  Co.,  22  N.  Y.  289,  290:  "There  are  no 
doubt  cases  in  which  a  corporation  would  be  estopped  from  setting 
up  this  defense,  although  its  contract  might  have  been  really  un- 
authorized. It  would  not  be  available  in  a  suit  brought  by  a 
bona  fide  indorsee  of  a  negotiable  promissory  note,  provided  the 
corporation  was  authorized  to  give  notes  for  any  purpose;  and 
the  reason  is,  that  the  corporation,  by  giving  the  note  has  virtually 
represented,  that  it  was  given  for  some  legitimate  purpose,  and 
the  indorsee  could  not  be  presumed  to  know  the  contrary.  The 
note,  however,  if  given  by  a  corporation  absolutely  prohibited 
by  its  charter  from  giving  notes  at  all,  would  be  voidable  not 
only  in  the  hands  of  the  original  payee,  but  in  those  of  any  sub- 
sequent holder ;  because  all  persons  dealing  with  a  corporation 
are  bound  to  take  notice  of  the  extent  of  its  chartered  powers. 
The  same  principle  is  applicable  to  contracts  not  negotiable.  When 
the  want  of  power  is  apparent  upon  comparing  the  act  done  with 
the  terms  of  the  charter,  the  party  dealing  with  the  corporation 
is  presumed  to  have  knowledge  of  the  defect,  and  the  defense 
of  ultra  vires  is  available  against  him.  But  such  a  defense  would 
not  be  permitted  to  prevail  against  a  party  who  cannot  be  pre- 
sumed to  have  had  any  knowledge  of  the  want  of  authority  to 
make  the  contract.  Hence,  if  the  question  of  power  depends  not 
merely  upon  the  law  under  which  the  corporation  acts,  but  upon 
the  existence  of  certain  extrinsic  facts,  resting  peculiarly  within 
the  knowledge  of  the  corporate  officers,  then  the  corporation 
would  be  estopped  from  denying  that  which,  by  assuming  to 
make  the  contract  it  had  virtually  affirmed." 

This  doctrine  seems  to  us  sound  and  reasonable ;  and  in  con- 
formity with  it  it  was  held  in  Farmers'  &  Mechanics'  Bank  v. 
Empire  State  Stone  Dressing  Co.,  5  Bosw.  275,  that  an  accommo- 
dation acceptance  by  an  officer  of  a  manufacturing  corporation, 
on  behalf  of  the  company,  was  not  binding,  unless  the  considera- 
tion had  been  advanced  upon  the  faith  of  acceptance;  but  that  if 
the  consideration  was  paid  in  good  faith  after  the  acceptance,  and 
upon  the  credit  of  it,  it  could  be  enforced. 

So  it  was  said  by  Lord  St.  Leonards  that  he  felt  a  disposition 
"to  restrain  the  doctrine  of  ultra  vires  to  clear  cases  of  excess 
of  power,  with  the  knowledge  of  the  other  party,  express  or 
implied  from  the  nature  of  the  corporation,  and  of  the  contract 
entered  into."  Eastern  Counties  Railway  Co.  v.  Hawkes,  5  H.  L, 
Cas.  331,  373. 

The  cases  on  which  the  defendants  rely  are  cases  against  mu- 
nicipal corporations,  in  respect  to  which  the  rule  is  much  more 
rigid,  or  for  the  most  part  those  in  which  the  other  contracting 


132  POWERS. 

party  had  notice  upon  the  face  of  the  transaction  of  the  want  of 

corporate  power. 

There  can  be  no  doubt  that  it  is  very  often  true  that  a  corpora- 
tion may  be  responsible  for  the  unauthorized,  and  even  for  the 
unlawful  acts  of  its  agents,  apparently  clothed  with  its  authority. 
No  corporation  is  empowered  by  its  charter  to  commit  an  assault 
and  battery;  yet  it  has  frequently  been  held  accountable,  in  this 
Commonwealth,  for  one  committed  by  its  servants. 

Bills  of  a  bank  issued  without  consideration,  and  even  stolen, 
are  good  in  the  hands  of  an  innocent  holder  for  value.  Many 
other  illustrations  might  be  given,  but  enough  has  been  said  to 
show  the  principle  on  which  our  decision  rests. 

Judgment  for  the  plaintiffs. 


JONES  V.   GUARANTEE,   &c.   COMPANY. 

1879.     loi  U.  S.  622,  25  L.  ed.  1030. 

Power  to  Give  a  Mortgage. 

MR.  JUSTICE  SWAYNE:  *  *  *  The  central  and  con- 
trolling questions  to  be  determined  are: 

Whether  the  Oil  Company  had  the  power  to  give  a  mortgage 
for  future  advances ;  and, 

Whether  the  mortgage  here  in  question  is,  in  the  view  of  a 
court  of  equity,  for  the  debt  of  the  Oil  Company  or  for  the  debt 
of  Abraham   M.   Cozzens. 

The  oral  arguments  of  the  eminent  counsel  who  appeared  be- 
fore us  were  addressed  principally  to  these  subjects.  Numerous 
other  points  are  made  by  the  counsel  for  the  appellant  in  his  brief, 
and  have  been  fully  discussed  in  the  printed  arguments  upon  both 
sides.  They  are  minor  in  their  character,  and  we  think  involve 
no  proposition  that  admits  of  doubt  as  to  its  proper  solution.  We 
are  satisfied  with  the  disposition  made  of  them  by  the  Circuit 
Court,  and  shall  pass  them  by  without  further  remark. 

At  the  common  law,  every  corporation  had,  as  incident  to  its 
existence,  the  power  to  acquire,  hold,  and  convey  real  estate, 
except  so  far  as  it  was  restrained  by  its  charter  or  by  act  of 
Parliament.  This  comprehensive  capacity  included  also  personal 
effects  of  every  kind. 

The  jus  disponendi  was  without  limit  or  qualification.  It  ex- 
tended to  mortgages  given  to  secure  the  payment  of  debts,  i 
Kyd,  Corp.  69,  76,  78,  108;  Angell  &  Ames,  §  145;  2  Kent, 
Com.  282;  Reynolds  v.  Commissioners  of  Stark  County,  5  Ohio, 
204;  Whitewater  Valley  Canal  Co.  v.  Valette,  21  How.  414. 

A  mortgage  for  future  advances  was  recognized  as  valid  by 
the  common  law.    Gardner  v.  Graham,  7  Vin.  Abr.  22,  pi.  3.     See 


JONES    V.    GUARANTEE,    &C.,    COMPANY.  1 33 

also  Brinkerhoff  v.  Marvin,  5  Johns.  (N.  Y.)  Ch.  320;  Lawrence 
V.  Tucker,  23  How.  14. 

It  is  believed  that  they  are  held  valid  throughout  the  United 
States,  except  where  forbidden  by  the  local  law. 

The  statute  under  which  the  Oil  Company  came  into  existence 
made  it  "capable  in  law  of  purchasing,  holding,  and  conveying 
any  real  and  personal  estate,  whenever  necessary  to  enable"  it  to 
carry  on  its  business;  but  it  was  forbidden  to  "mortgage  the 
same,  or  give  any  lien  thereon."  This  disability  was  removed  by 
the  later  act  of  1864,  which  expressly  conferred  the  power  before 
withheld.  This  change  was  remedial,  and  the  clause  which  gave  it 
is,  therefore,  to  be  construed  liberally  with  reference  to  the  ends 
in  view. 

The  learned  counsel  for  the  appellant  insisted  that  a  mortgage 
could  be  competently  given  by  the  Oil  Company  only  to  secure  a 
debt  incurred  in  its  business  and  already  subsisting.  This,  we 
think,  is  too  narrow  a  construction  of  the  language  of  the  law. 
A  thing  may  be  within  a  statute,  but  not  within  its  letter,  or 
within  the  letter  and  yet  not  within  the  statute.  The  intent  of 
the  lawmaker  is  the  law.  The  People  v.  Utica  Insurance  Co.,  16 
Johns.   (N.  Y.)   357;  United  States  v.  Babbit,   i   Black,  55. 

The  view  of  the  court  in  Thompson  v.  Xew  York  &  Hudson 
River  Railroad  Co..  3  Sandf.  (N.  Y.)  Ch.  625,  was  sounder  and 
better  law.  There  the  charter  authorized  the  corporation  to 
build  a  bridge.  It  found  one  already  built  that  answered  every 
purpose,  and  bought  it.  The  purchase  was  held  to  be  intra  vires 
and  valid.  Here  the  object  of  the  authorization  is  to  enable  the 
company  to  procure  the  means  to  carry  on  its  business.  Why 
should  it  be  required  to  go  into  debt,  and  then  borrow,  if  it  could, 
instead  of  borrowing  in  advance,  and  shaping  its  affairs  accord- 
ingly? No  sensible  reason  to  the  contrary  can  be  given.  If  it 
may  borrow  and  give  a  mortgage  for  a  debt  antecedently  or  con- 
temporaneously created,  why  may  it  not  thus  provide  for  future 
advances  as  it  may  need  them?  This  may  be  more  economical 
and  more  beneficial  than  any  other  arrangement  involving  the 
security  authorized  to  be  given.  In  both  these  later  cases  the 
ultimate  result  with  respect  to  the  security  would  be  just  the  same 
as  if  the  mortgage  were  given  for  a  pre-existing  debt  in  literal 
compliance  with  the  statute.  No  one  could  be  wronged  or  in- 
jured, while  the  corporation,  whom  it  was  tTie  purpose  of  the 
law  to  aid,  might  be  materially  benefited.  Is  not  such  a  departure 
within  the  meaning,  if  not  the  letter,  of  the  statute?  There 
would  be  no  more  danger  of  the  abuse  of  the  power  conferred 
than  if  it  were  exercised  in  the  manner  insisted  upon.  The  safe- 
guard provided  in  the  required  assent  of  stockholders  would  apply 
with  the  same  efficacy  in  all  the  cases.  The  object  of  the  loan, 
the  application  of  the  money,  and  the  restraints  imposed  by  the 
charter  in  those  particulars,  would  be  the  same  whether  the  trans- 
action took  one  form  or  the  other.     According  to  our  construe- 


134  POWERS. 

tion  the  company  could  give  no  mortgage  but  one  growing  out 
of  their  business,  and  intended  to  aid  them  in  carrying  it  on.  In 
legal  effect  the  difference  between  the  two  constructions  is  one 
merely  of  mode  and  manner,  and  not  of  substance. 

Such  securities  are  not  contrary  to  the  law  or  public  policy  of 
the  State.  Many  cases  are  found  in  her  reported  adjudications 
where  both  judgments  and  mortgages  for  future  advances  have 
been  sustained. 

Our  view  is  not  without  support  from  the  language  of  the 
statute,  that  "every  mortgage  so  made  shall  be  as  valid  to  all 
intents  and  purposes  as  if  executed  by  an  individual  owning  such 
real  estate."  If  this  mortgage  had  been  given  by  individuals,  the 
question  we  are  examining  doubtless  would  not  have  been  brought 
before  us  for  consideration. 

When  a  deed  is  fatally  defective  for  the  want  of  a  sufficient 
consideration  to  support  it,  such  consideration  subsequently  aris- 
ing may  cure  the  defect  and  give  the  instrument  validity.  Sum- 
ner V.  Hicks,  2  Black,  532.  It  is  not  necessary  to  go  through  the 
form  of  executing  a  second  deed  to  take  the  place  of  the  first  one. 
This  principle  applies  to  the  mortgage  after  all  the  advances  had 
been  made,  conceding  that  it  had  before  been  invalid  for  the  rea- 
son insisted  upon. 

The  statute  of  1864  neither  expressly  forbids  nor  declares  void 
mortgages  for  future  advances. 

If  the  one  here  in  question  be  ultra  vires,  no  one  can  take  ad- 
vantage of  the  defect  of  power  involved  but  the  State.  As  to  all 
other  parties  it  must  be  held  valid,  and  may  be  enforced  accord- 
ingly. Silver  Lake  Bank  v.  North,  4  Johns.  (N.  Y.)  Ch.  370; 
National  Bank  v.  Mathews,  98  U.  S.  621.  In  the  latter  case  this 
subject  was  fully  examined. 

A  corporation  can  act  only  by  its  agents.  If  there  were  any 
such  technical  defect  as  is  claimed  touching  the  execution  of  this 
mortgage,  it  has  been  cured  by  acquiescence  and  ratification  by 
the  mortgagor. 

No  one  else  can  raise  the  question.  All  other  parties  are  con- 
cluded.    Gordon  v.  Preston,  i  Watts  (Pa.),  385. 

Where  money  had  been  obtained  by  a  corporation  upon  its 
securities,  which  were  irregular  and  ultra  vires,  but  the  money 
was  applied  for  the  benefit  of  the  company,  with  the  knowledge 
and  acquiescence  of  the  shareholders,  the  company  and  the  share- 
holders were  estopped  from  denying  the  liability  of  the  company 
to  repay  it.  And  the  same  results  follows  where  such  securities 
are  issued  with  the  knowledge  of  the  shareholders,  so  far  as  the 
money  thus  raised  is  applied  for  the  benefit  of  the  company.  In 
re  Cork  &  Youghal  Railway  Co.,  Law  Rep.  4  Ch.  748. 

A  court  of  equity  abhors  forfeitures,  and  will  not  lend  its  aid 
to  enforce  them.  Marshall  v.  Vicksburg,  15  Wall.  146.  Nor  will 
it  give  its  aid  in  the  assertion  of  a  mere  legal  right  contrary  to 


RAILROAD    COMPANY    V.    MARSEILLES.  I35 

the  clear  equity  and  justice  of  the  case.     Lewis  v.  Lyons,  13  111. 

The  second  point  to  be  considered  is  whether  the  mortgage  was 
for  the  debt  of  Cozzens  or  for  the  debt  of  the  Oil  Company.  *  *  * 

We  are  satisfied  beyond  a  doubt  that  it  was  the  debt  of  the  Oil 
Company  and  not  his  debt  that  was  intended  to  be  secured  and 
was  secured  by  the  mortgage.     *     *     * 

Decree  affirmed. 


RAILROAD  COMPANY  v.   MARSEILLES.^ 
Supreme  Court  of  Illinois,   1876. 

84  111.  643. 
Poiver  of  a   Corporation   to   Purchase  and  Hold  its  Own   Stock. 

PER  CURIAM :  On  considering  the  petition  heretofore  filed, 
we  granted  a  rehearing  to  further  consider  the  question,  whether 
the  railroad  company  had  the  power  to  contract  for  and  purchase 
shares  of  stock  of  its  own  company.  *  *  *  'Yhe  rule  is  fa- 
miliar, and  is  not  contested,  that  such  bodies  can  only  exercise 
such  powers  as  may  be  conferred  by  the  legislative  body  creating 
them,  either  in  express  terms  or  by  necessary  implication ;  and 
the  implied  powers  are  presumed  to  exist  to  enable  such  bodies 
to  carry  out  the  express  powers  granted  and  to  accomplish  the 
purpose  of  their  creation.  Such  being  the  rule,  the  question  arises 
whether  this  corporate  body  might  make  such  a  purchase,  or  is 
it  outside  of,  and  beyond  the  limit  of  its  power. 

Appellant  has  referred  us  to  a  number  of  cases  in  our  own 
court,  in  which  it  has  been  held  that  such  organizations  have  no 
power  to  release  subscribers  for  their  stock  from  paying  therefore 
and  from  their  subscriptions;  that,  when  such  subscriptions  are 
intended  to  be  fictitious,  or  the  subscribers  are  released  from  pav- 
ment,  it  operates  as  a  wrong,  if  not  a  fraud,  on  the  other  sub- 
scribers for  stock  in  the  same  company.  But  here,  the  stock  had 
been  subscribed,  paid  for.  and  certificates  thereof  issued  to.  and 
they  were  owned  and  held  by.  the  village  at  the  time  this  contract 
was  entered  into  and  executed.  So,  the  question  is  not,  w^iether 
appellant  may  release  the  village  from  paying  for  and  receiving 
shares  subscribed  for,  but  whether  appellant  has  power  to  pur- 
chase shares  of  its  own  stock,  paid  for,  issued  to.  and  held  by 
the  village. 

In  the  case  of  Taylor  v.  Miami  Exportation  Co..  6  Ohio  (Ham- 
mond), 83,  it  was  held  that  a  banking  corporation  might  law- 
fully receive  shares  of  its   own   stock   from  a   solvent  debtor  in 

'See  Clapp  v.  Peterson.  104  111.  26  (1882);  Trevor  v.  Whitworth,  L.  R. 
12  App.  Cases  409  (1887). 


136 


POWERS. 


discharge  of  his  indebtedness.  The  court  went  further,  and  held 
that,  where  a  large  number  of  shares  had  been  issued  to  enable 
the  'holder  to  vote  for  certain  persons  for  directors  at  an  ap- 
proaching election,  and,  after  the  holder  had  thus  voted,  the 
money  paid  for  the  shares  was  returned  to  him,  and  he  restored 
the  shares  to  the  bank,  as  there  was  no  loss  sustained  by  the 
transaction,  and  the  result  of  the  election  was  not  changed,  and 
whilst  the  court  condemned  the  transaction,  it  held  that  equity 
could  afford  no  relief,  as  no  one  had  been  injured.  It  was  also 
held  in  that  case  that,  where  the  shares  of  the  company  were 
transferred  to  it  in  payment  of  such  indebtedness,  the  corporation 
might  hold  and  sell  it  as  it  did  its  other  property. 

In  the  case  of  the  City  Bank  of  Columbus  v.  Bruce,  17  N.  Y. 
507,  it  appeared  that  the  board  of  directors  passed  a  resolution 
that  all  stockholders  indebted  to  the  bank  on  stock  notes,  by  a 
specified  day,  might  pay  such  debts  to  the  bank  in  its  shares  of 
stock,  at  a  named  per  cent.,  and  that  not  far  from  half  of  the 
stock  of  the  bank  was  thus  surrendered;  and  the  court  held, 
there  was  no  ground  for  questioning  the  validity  of  the  trans- 
action; that  no  rule  of  common  law  or  any  provision  of  the  char- 
ter forbade  it;  and  the  Ohio  case  is  referred  to  and  approved  by 
the  court. 

In  the  case  of  Williams  v.  The  Savage  Manufacturing  Co.,  3 
Md.  Ch.  R.  452,  it  was  held  that  banking  corporations  had  the 
right  to  take  shares  of  their  own  stock  in  pledge  or  payment  of 
indebtedness  to  the  corporation,  and  to  reissue  the  same.  On 
the  latter  proposition  Ex  parte  Holmes,  5  Cow.  426,  is  referred 
to  by  the  court  in  its  support. 

In  the  case  of  The  State  v.  Smith,  48  Vt.  R.  266,  it  was  held, 
that  where  a  railroad  company  had  purchased  2,350  shares  of  the 
stock  of  the  company,  the  stock  did  not  merge,  and  the  legality 
of  the  purchase  seems  to  be  recognized  by  the  court.  And  in 
further  support  of  the  rule  see  Angell  &  Ames  on  Corp.  §  280, 
where  it  is  said  it  is  one  of  the  corporate  powers  that  may  be 
legally  exercised. 

If,  then,  as  in  the  cases  above  referred  to,  a  bank  may  purchase 
and  hold  its  own  shares,  no  reason  is  perceived  why  a  railroad 
corporation  may  not  do  the  same  thing,  and  the  case  of  the  State 
V.  Smith  (supra)  was  the  purchase  of  stock  by  a  railroad  com- 
pany, and  of  shares  of  its  own  stock.  These  authorities,  we 
think,  fully  recognize  the  power  of  the  directors  of  a  company, 
when  not  prohibited  by  their  charter,  to  purchase  shares  of  stock 
of  their  company.  It  falls  within  the  scope  of  the  power  of  the 
directors  to  manage  and  control  the  affairs  and  property  of  the 
company  for  the  best  interests  of  the  stockholders,  and  when 
they  have  thus  acted,  we  will  presume,  until  the  contrary  is 
shown,  that  the  purchase  was  for  legitimate  and  authorized  pur- 
poses. 

If  it  were  shown  that  the  i)urchase  was  made  to  promote  the 


COPPIN   V.   GREENLESS,   &C.,   COMPANY.  I37 

interests  of  the  officers  of  the  company  alone,  and  not  the  stock- 
holders generally,  or  if  for  the  benefit  of  a  portion  of  the  stock- 
holders and  not  all,  or  for  the  injury  of  all  or  only  a  portion  of 
them,  or  if  it  operated  to  the  injury  of  creditors,  or  would  defeat 
the  end  for  which  the  body  was  created,  or  if  it  was  done  for  any 
other  fraudulent  purpose,  then  chancery  could  interfere.  In  such 
case,  Alelvin  v.  The  Lamar  Ins.  Co.,  80  111.  446,  and  other  cases 
in  chancery  referred  to  in  appellant's  brief,  would  apply,  but  the 
defense  cannot  be  made  a  law.  The  case  of  Bel  ford  Railroad  Co. 
V.  Bower,  48  Pa.  St.  R.  29,  was  in  a  court  where  there  is  no  dis- 
tinction between  actions  at  law  and  suits  in  equity,  and  we  pre- 
sume the  defense  was  allowed  by  the  application  of  equitable 
principles,  and  the  cases  in  the  British  courts  which  seem  to  bear 
on  the  question  were  in  equity.  Whatever  may  be  the  rights  of 
stockholders  or  creditors,  if  there  are  any,  relief  can  only  be  had 
in  equity,  and  by  a  stockholder  or  other  cestui  que  trust. 

The  judgment  of  the  court  below  will,  therefore,  be  affirmed. 

Judgment  affirmed.- 


COPPIN  V.  GREEXLESS,  &c.,   COMPANY. 

1882.     38  Ohio  St.  275,  43  Am.  Rep.  425. 

Power  of  a  Corporation  to  Purchase  and  Hold  its  Ozvn  Shares. 

McILVAINE,  J.:  Whether  the  defendant  corporation  was 
bound  by  its  executory  agreement  with  the  plaintiff  to  purchase 
shares  of  its  own  stock,  under  the  circumstances  detailed  in  the 
petition,  was,  undoubtedly,  the  question  upon  which  the  case 
turned  in  the  district  court. 

The  power  of  a  trading  corporation  to  traffic  in  its  own  stock. 
where  no  authority  to  do  so  is  conferred  upon  it  by  the  terms  of 
its  charter,  has  been  a  subject  of  much  discussion  in  the  courts; 
and  the  conclusions  reached  by  dift'erent  courts  have  been  con- 
flicting. Of  course,  cases  wherein  the  power  is  found  to  exist  by 
express  or  implied  grant  in  the  charter,  furnish  no  aid  in  the  solu- 
tion of  the  question  before  us;  unless  the  claim  of  the  plaintiff 
can  be  sustained,  that  such  power  was  conferred  on  the  defendant 
by  section  63  of  the  corporation  act  of  1852  (S.  &  C.  301),  as 
amended,  which  confers  on  manufacturing  corporations  the  powers 

^In  the  recent  case  of  Richards  v.  Ernst  Wiener  Co.  (1912),  207  N.  Y. 
59,  aflfg.  145  App.  Div.  353,  P  sued  a  corporation  on  a  contract  made  by- 
it  to  repurchase  from  P  its  own  shares  of  stock.  Defense:  Contract 
not  enforcible  by  reason  of  sec.  664  of  the  New  York  Penal  Law  making 
it  a  misdemeanor  for  a  director  to  apply  any  of  the  funds  of  a  corporation 
"except  surplus  profits,"  to  "the  purchase  of  shares  of  its  own  stock." 
Held,  for  P.  The  burden  of  proof  is  upon  the  corporation  of  showing 
that  there  are  no  surplus  profits  out  of  which  the  purchase  can  be 
made. — Ed. 


138  POWERS. 

enumerated  in  section  3  of  the  act,  and  among  others,  the  power 
"to  acquire  and  convey  at  pleasure,  all  such  real  and  personal 
estate  as  may  be  necessary  or  convenient  to  carry  into  effect  the 
objects  of  the  corporation."  We  think,  however,  that  this  claim 
cannot  be  maintained.  The  sole  object  of  the  defendant  organi- 
zation was  "for  manufacturing  purposes;"  and  it  cannot  be  said 
in  any  just  sense,  that  the  power  to  acquire  or  convey  its  own 
stock  was  either  necessary  or  convenient  "for  manufacturing  pur- 
poses." 

The  doctrine  that  corporations,  when  not  prohibited  by  their 
charters  may  buy  and  sell  their  own  stocks,  is  supported  by  a 
line  of  authorities ;  and  prominent  among  them  may  be  mentioned 
the  cases  of  Dupee  v.  Boston  Water  Power  Co.,  114  Mass.  37, 
and  C.  P.  and  S.  R.  Co.  v.  Marseilles,  84  111.  145.  But  never- 
theless, we  think  the  decided  weight  of  authority  both  in  Eng- 
land and  in  the  United  States,  is  against  the  existence  of  the 
power  unless  conferred  by  express  grant  or  clear  implication.  The 
foundation  principle  upon  which  these  later  cases  rest  is  that  a 
corporation  possesses  no  powers  except  such  as  are  conferred 
upon  it  by  its  charter,  either  by  express  grant  or  necessary  im- 
plication; and  this  principle  has  been  frequently  declared  by  the 
Supreme  Court  of  this  State;  and  by  no  court  more  emphatically 
than  by  this  court.  It  is  true,  however,  that  in  most  jurisdic- 
tions, where  the  right  of  a  corporation  to  traffic  in  its  own  stock 
has  been  denied,  an  exception  to  the  rule  has  been  admitted  to 
exist,  whereby  a  corporation  has  been  allowed  to  take  its  own 
stock  in  satisfaction  of  a  debt  due  to  it.  This  exception  is  sup- 
posed to  rest  on  a  necessity,  which  arises  in  order  to  avoid  loss ; 
and  was  recognized  in  this  State  as  early  as  Taylor  v.  Miami  Ex- 
porting Co.,  6  Ohio,  176,  and  has  been  incidentally  referred  to 
as  an  existing  right  since  the  adoption  of  our  present  constitu- 
tion.    State  v.  Building  Association,  35  Ohio  St.  258. 

But,  however  that  may  be,  the  right  of  a  corporation  to  traffic 
in  its  own  stock,  at  pleasure,  appears  to  lis  to  be  inconsistent 
with  the  principle  of  the  provisions  of  the  present  constitution, 
article  13,  section  3,  which  reads  as  follows :  "Dues  from  corpo- 
rations shall  be  secured  by  such  individual  liability  of  stockhold- 
ers, and  other  means,  as  may  be  prescribed  by  law ;  but  in  all 
cases,  each  stockholder  shall  be  liable,  over  and  above  the  stock 
by  him  or  her  owned,  and  any  amount  unpaid  thereon,  to  a  fur- 
ther sum,  at  least  equal  in  amount  to  such  stock."  Now,  it  is 
just  as  plain,  that  a  business  or  trading  corporation  cannot  exist 
without  stock  and  stockholders,  as  it  is  that  the  creditors  of  such 
corporations  are  entitled  to  the  security  named  in  the  constitution. 
State  ex  rel.  Att'y-Gen.  v.  Sherman,  22  Ohio  St.  411.  The  cor- 
poration itself  cannot  be  a  stockholder  of  its  own  stock  within 
the  meaning  of  this  provision  of  the  constitution.  Nobody  will 
deny  this  proposition.  And  if  a  corporation  can  buy  one  share 
of  its  stock  at  pleasure,  why  may  it  not  buy  every  share?     If  the 


COPPIN   V.   GREENLESS,   &C.,   COMPANY.  139 

right  of  a  corporation  to  purchase  its  own  stock  at  pleasure  ex- 
ists and  is  unHinited,  where  is  the  provision  intended  for  the  ben- 
efit of  creditors?  This  is  not  the  security  to  which  the  constitu- 
tion invites  the  creditors  of  corporations.  I  am  aware,  that  the 
amount  of  stock  required  to  be  issued  is  not  fixed  by  the  consti- 
tution or  by  statute,  and  also  that  provision  is  made  by  statute 
for  the  reduction  of  the  capital  stock  of  corporations ;  but  of 
these  matters,  creditors  are  bound  to  take  notice.  They  have  a 
right,  however,  to  assume  that  stock  once  issued,  and  not  called 
back  in  the  manner  provided  by  law,  remains  outstanding  in  the 
hands  of  stockholders  liable  to  respond  to  creditors  to  the  extent 
of  the  individual  liability  prescribed.  In  this  view  it  matters  not 
whether  the  stock  purchased  by  the  corporation  that  issued  it, 
becomes  extinct,  or  is  held  subject  to  be  reissued.  It  is  enough 
to  know  that  the  corporation,  as  purchaser  of  its  own  stock  does 
not  afford  to  creditors  the  security  intended.  And  surely,  if  the 
law  forbids  the  organization  of  a  corporation  without  stock,  be- 
cause the  required  security  is  not  furnished,  it  cannot  be,  that  hav- 
ing brought  the  corporation  into  existence,  it  invests  it  with  power 
to  assume,  at  pleasure,  the  identical  character  or  relation  to  the 
public,  that  was  an  insurmountable  objection  to  the  giving  of 
corporate  existence  in  the  first  place. 

Plaintiff  in  error  lays  much  stress  on  the  averments  in  the  peti- 
tion, that  it  had  been  the  custom  of  the  corporation  that  its  offi- 
cers and  others  actively  engaged  in  its  service,  should  be  holders 
of  shares  of  its  stock,  and  upon  ceasing  to  be  connected  with  the 
company  such  persons  had  been  accustomed  to  sell,  and  the  com- 
pany to  buy  such  stock ;  and  that  the  plaintifif  had  purchased  the 
stock  for  the  price  of  which  suit  was  brought  while  in  the  em- 
ployment of  defendant. 

We  cannot  see  why  these  averments  should  take  the  case  out 
of  the  general  rule. 

If  it  were  averred  that  the  plaintiff  had  purchased  this  stock 
from  the  defendant,  or  from  others,  under  an  agreement  with  the 
company  that  it  would  buy  the  same  from  him  when  he  quit  its 
employment  or  if  the  contract  of  purchase  by  the  defendant  had 
been  executed,  very  different  questions  would  arise. 

It  is  not  even  averred,  that  the  plaintifif  relied  upon  such  custom 
either  in  making  the  purchase  or  the  sale  of  the  stock;  so  that,  in 
fact,  he  is  unafifected  by  the  alleged  custom.  But  if  such  custom 
had  been  relied  on  by  the  plaintifif  when  he  purchased  the  stock, 
it  would  not  have  made  the  executory  contract  of  the  defendant 
to  buy  the  stock  binding,  which,  without  such  custom  would  be 
void.  The  usage  of  a  corporation  does  not  become  the  law  of  its 
existence,  or  the  measure  of  its  powers.  The  general  law  of  the 
State,  of  which  all  persons  are  presumed  to  have  knowledge,  is 
the  source  and  limit  of  all  its  powers  and  duties ;  and  these  can- 
not be  varied  either  by  usage  or  contract.  The  doctrine  of  es- 
toppel  has   no   application   in   the   case.      Nor   is   there   any   such 


POWERS. 


140 

equity  in  the  case  as  would  have  arisen  between  the  parties  in 
case  the  contract  had  been  executed. 
Judgment  affirmed. 

FRANKLIN  BANK  v.  COMMERCIAL  BANK.^ 

1881.     36  Ohio  St.  350,  38  Am.  Rep.  594. 

Power  of  Corporation  to  Hold  Stock  in  Another  Corporation. 

BOYNTON,  J. :    We  are  met  at  the  threshold  of  the  case  with 
the  inquiry,  whether  an  action  will  lie  in   favor  of  the  plaintiff 
against  the  defendant   for  refusing  to  transfer,  on  the  books  of 
the   defendant,    to    the   name    of   the   plaintiff,    the   two    hundred 
shares  of  the  capital  stock  of  the  defendant,  represented  by  the 
certificate  issued  to  Foote,  and  by  him  pledged  to  the  plaintiff  as 
security  for  the  loan  obtained.     Such  refusal  to  so  transfer  said 
stock,  and  an  alleged  consequent  conversion  of  the  same  by  the 
defendant  constitute  the  gravamen  of  the  plaintiff's  action.     The 
1 2th  section  of  the  act  under  which  the  two  corporations  were 
organized  and   from  which  they  derived  their  powers,  expressly 
provided,  that  no  banking  company  organized  under  its  provisions 
should  be  the  holder  or  purchaser  of  any  portion  of  its  capital 
stock  or  of  the  capital  stock  of  any  other  incorporated  company, 
unless  such  purchase  should  be  necessary  to  prevent  loss  upon  a 
debt  previously  contracted  in  good   faith,  on  security,  which,  at 
the  time,  was   deemed  adequate  to  insure  the  payment   of   such 
debt,  independent  of  any  lien  upon  such  stock   ( i    S.  &  C._  170, 
§   12).     And  by  section  29  it  was  provided,  that  all  the  rights, 
privileges,   and   franchises  which   the  company   derived   from  the 
act  should  be   forfeited,  if  the  directors  of  the  company  should 
knowingly  violate,  or  permit  any  of  the  officers  or  agents  of  the 
•  company  to  violate  any  of  the  provisions  of  the  act.     That  the 
stock  in  the  present  case  was  pledged   or   received   to   secure   a 
precedent  loan  is  not  claimed. 

There  would  seem  to  be  little  doubt,  either  upon  prmciple  or 
authority,  and  independently  of  express  statutory  prohibition  of 
the  same,  that  one  corporation  can  not  become  the  owner  of  any 
portion  of  the  capital  stock  of  another  corporation,  unless  author- 
ity to  become  such  is  clearly  conferred  by  statute.  Mutual  Sav- 
ings Bank,  &c.,  v.  Meriden  Agency,  24  Conn.  159;  Franklin  Com- 
pany V.  Lewiston  Savings  Bank,  68  Me.  43;  Central  Railroad 
■  Company  v.  Collins,  40  Ga.  582;  Sumner  v.  Marcy,  3  W.  &  M. 
105.  Were  this  not  so,  one  corporation,  by  buying  up  the  major- 
ity of  the  shares  of  the  stock  of  another,  could  take  the  entire 

»See    also    Milbank  v.  Railroad  Co.,  64  How.  Pr.   (N.  Y.)   20  (1882) 
In  re  Asttic  Banking  Co.,  L^R- /  Ch    Ap      2      /     6  ^^^^^^^^ 

Bank  V.  National  Exchange  Bank,  92  U.  S.  122  (1875).— Ed. 


FRANKLIN    BANK    V.    COMMERCIAL    BANK.  I4I 

management  of  its  business,  however  foreign  such  business  might 
be  to  that  which  the  corporation  so  purchasing  said  shares  was 
created  to  carry  on.  A  banking  corporation  could  become  the 
operator  of  a  railroad,  or  carry  on  the  business  of  manufacturing 
and  any  other  corporation  could  engage  in  banking  by  obtaining 
the  control  of  the  bank's  stock.  Nor  would  this  result  follow 
any  the  less  certainly,  if  the  shares  of  stock  were  received  in 
pledge  only,  to  secure  the  payment  of  a  debt,  provided  the  shares 
were  transferred  on  the  books  of  the  company  to  the  name  of  the 
pledgee.  A  person  in  whose  name  the  stock  of  a  corporation 
stands  on  the  books  of  the  corporation  is,  as  to  the  corporation, 
a  stockholder,  and  has  a  right  to  vote  upon  the  stock.  State  ex 
rel.  White  v.  Ferris,  42  Conn.  560;  Ex  parte  Wilcox,  7  Cow. 
402;  In  re  Barker,  6  Wend.  509;  Hopin  v.  Buffum,  9  R.  I.  513; 
Field  on  Corp.   §  69. 

Hence,  if  the  plaintiff  appeared  on  the  books  of  the  defendant 
as  the  transferee  or  owner  of  the  two  hundred  shares  of  stock 
represented  by  the  certificate  to  Foote,  it  would  have  the  right  to 
vote  upon  the  stock  at  all  meetings  of  the  stockholders  of  the 
defendant;  and  it  would  only  be  necessary  for  it  to  procure  in 
pledge,  as  security  as  money  loaned,  a  majority  of  the  shares  of 
the  capital  stock  of  the  Commercial  Bank,  in  order  to  obtain  full 
control  of  its  afifairs,  and  take  charge  of  its  banking  operations. 
This  would  not  only  be  exercising  powers  granted  to  the  plaintiff 
neither  expressly  nor  by  implication,  but  those  which  are  clearly 
opposed  to  the  manifest  spirit  and  intent,  if  not  to  the  language 
of  the  statute.  This  court  has  uniformly  adhered  to  the  doctrine 
announced  in  Straus  v.  Eagle  Insurance  Co.,  5  Ohio  St.  59;  that 
corporations  have  such  powers,  and  such  only,  as  the  act  creating 
them  confers;  and  are  confined  to  the  exercise  of  those  expressly 
granted,  and  such  incidental  powers  as  are  necessary  to  carry  into 
effect  those  specifically  conferred.  Bank  of  Buffalo  v.  Toledo  F. 
&  M.  Ins.  Co.,  12  Ohio  St.  601.  This  principle  has  recently  been 
most  emphatically  asserted,  both  by  the  Supreme  Court  of  the 
United  States,  in  Thomas  v.  Railroad  Co..  loi  U.  S.  71,  and  by 
the  House  of  Lords,  in  Ashbury  Railroad  Carriage  &  Iron  Co. 
v.  Riche,  L.  R.  7  H.  L.  653.  It  was  claimed  in  argument  in  both 
of  these  cases,  that  a  corporate  body  may  do  anv  act  which  is 
neither  expressly  or  impliedly  prohibited  by  its  charter;  although 
it  was  conceded  that  a  stockholder  might  enjoin  the  act,  where 
it  was  not  authorized,  either  expressly  or  by  implication,  and  that 
the  State  by  proper  process  and  proceedings  might  forfeit  the 
charter.  ^  But  it  was  held,  in  the  first  case,  that  the  powers  of  a 
corporation  organized  under  a  legislative  enactment  are  such  only 
as  the  statute  confers,  and  that  the  enumeration  of  them  implies 
the  exclusion  of  all  others;  and  by  the  second  case,  that  the 
contract  sued  on.  being  of  a  nature  not  included  in  the  ]\Iemoran- 
dum  of  Association,  was  ultra  vires,  not  only  of  the  directors,  but 


142  POWERS. 

of  the  whole  company,  and  which  the  whole  body  of  shareholders 
was  incapable  of  ratifying. 

Notwithstanding  the  rule  thus  prevailing,  the  act  under  which 
both  the  plaintiff  and  the  defendant  were  organized,  did  not  leave 
the  right  or  power  of  the  plaintiff  to  acquire  the  title  to  shares  of 
stock  in  another  corporation,  to  be  determined  alone  upon  the 
principle  of  construction  which  the  rule  above  stated  adopted. 
The  right  to  deal  in  shares  of  stock  in  other  corporations  is  not 
only  not  found  among  the  enumerated  powers  which  the  act  con- 
fers upon  banks  organized  under  its  provisions,  but  the  power,  in 
language,  of  the  most  undoubted  import,  is  denied,  and  its  exer- 
cise expressly  prohibited.  It  therefore  follows  that  the  refusal  of 
the  defendant  to  permit  the  transfer  upon  its  books  to  the  plain- 
tiff of  the  two  hundred  shares  of  its  stock,  violated  no  right  of 
the  plaintiff,  and  consequently  created  no  liability  on  the  part  of 
the  defendant.  Such  refusal  did  not  amount  to  a  conversion  of 
the  stock. 

Its  action  in  refusing  the  transfer  was  but  the  denial  of  any 
right  by  the  plaintiff  to  be  placed  in  a  position  to  interfere  and 
participate  in  the  control  and  management  of  its  internal  affairs. 
To  the  claim  of  the  plaintiff,  that  it  was  the  duty  of  the  defend- 
ant to  make  the  transfer,  when  the  same  was  demanded,  and  leave 
the  State  to  impose  the  penalty  of  forfeiture  on  the  plaintiff  for 
a  violation  of  its  charter,  we  do  not  assent.  The  cases  of  Union 
National  Bank  v.  Mathews,  98  U.  S.  621,  and  Jones  v.  Guarantee 
&  Indemnity  Co.,  loi  U.  S.  622,  and  the  cases  therein  cited,  do 
not  support  such  proposition.  The  principle  of  those  cases  is, 
that  where  a  corporation  is  incompetent  by  its  charter  to  take  a 
title  to  real  estate,  a  conveyance  to  it  is  not  void,  but  voidable 
only,  and  that  the  sovereign  alone  can  object;  that  the  conveyance 
is  valid  until  assailed  in  a  direct  proceeding  instituted  for  that 
purpose.  But  they  neither,  by  the  principle  maintained,  nor  by 
the  reasoning  advanced  in  support  of  it,  sanction  the  doctrine  that 
one  corporation  may  buy  up  the  stock  of  another,  and  thereby 
enable  itself  to  interfere  with  the  internal  management  of  its  af- 
fairs, especially  where  the  power  to  do  so  is  expressly  prohibited 
by  its  charter. 

In  our  opinion  the  petition  stated  no  cause  of  action  against  the 
defendant,  and  hence  laid  no  foundation  for  a  judgment  in  favor 
of  the  plaintiff.  That  the  plaintiff  may  have  acquired  rights  by 
the  pledge  received  from  Foote,  to  such  interest  in  the  bank  as 
said  certificate  of  stock  represented  is  quite  true.  But  what  that 
interest  is,  if  any,  we  cannot  in  the  present  case  determine. 

Judgment  affirmed. 


EASUN    V.    BUCKEYE    BREWING    CO.  143 

EASUN  V.  BUCKEYE  BREWING  CO. 

U.  S.  Circuit  Court,  N.  D.  Ohio,  W.  D. 

1892.     51    Fed.   Rep.   156. 

Power     of   Corporation    to   Hold   Stock   in   Another   Corporation. 

This  is  an  action  instituted  by  the  plaintiff  to  recover  damages 
for  the  faikire  of  the  defendants  to  comply  with  the  provisions  of 
a  contract  by  the  terms  of  which  the  Buckeye  Brewing  Co.  ob- 
ligated itself  to  sell  to  the  vendee  certain  brewing  property. 

The  purchaser  as  a  consideration  for  the  sale  agreed  to  pay  the 
vendor  the  sum  of  $860,000,  whereof  "the  sum  of  $10,000  shall 
be  paid  in  cash  by  way  of  a  deposit;  the  further  sum  of  $334,000 
shall  be  paid  in  cash  on  or  before  the  completion  of  the  pur- 
chase; the  further  sum  of  $258,000,  by  issue  to  the  vendors  or  as 
they  may  appoint,  of  six  per  cent,  debenture  bonds  of  an  English 
joint  stock  company,  proposed  to  be  formed  by  the  purchaser, 
hereinafter  referred  to  as  the  'company,'  provided  the  total 
amount  of  such  debenture  bonds  shall  not  exceed  ninety  thousand 
pounds ;  and  the  balance  of  $258,000  by  the  allotment  to  the 
vendors  of  ordinary  shares  of  the  company  of  that  equivalent, 
nominal  value,  such  shares  to  be  deemed  paid  up." 

The  Buckeye  Brewing  Co.  refused  to  perform  its  part  of  the 
contract. 

RICKS,  District  Judge ;  *  *  *  In  the  view  which  we  take  of 
this  case,  it  is  only  necessary  to  consider  the  question  of  whether 
or  not  this  contract  sued  upon  was  ultra  vires.  It  is  well  settled 
in  Ohio  that  corporations  have  such  powers,  and  such  only,  as  the 
act  creating  them  confers ;  and  are  confined  to  the  exercise  of 
those  expressly  granted,  and  such  incidental  powers  as  are  neces- 
sary to  carry  into  effect  those  specifically  conferred.  Under  this 
construction  of  the  statute,  it  was  clearly  settled  in  the  case  of 
Franklin  Bank  v.  Commercial  Bank,  36  Ohio  St.  350,  that  one 
corporation  cannot  become  the  owner  of  any  portion  of  the  cap- 
ital stock  of  another  corporation,  unless  authority  to  become 
such  is  clearly  conferred  by  the  statute.  The  provisions  of  this 
contract  clearly  contemplated  that  the  Buckeye  Brewing  Com- 
pany, which,  so  far  as  the  pleadings  before  us  show,  was,  at  the 
time  of  making  such  contract,  not  only  a  solvent  corporation, 
but  a  prosperous  and  profitable  one,  should  sell  and  dispose  of  its 
plant  and  all  its  assets,  and  a  very  large  part  of  the  considera- 
tion for  such  sale  was  to  be  stock  and  bonds  in  an  English  cor- 
poration to  be  organized  to  carry  on  the  business  of  the  vendee. 
The  provisions  of  the  contract  specified  as  to  the  rate  of  interest 
such  bonds  should  carry,  and  the  dividend  such  stock  should  pay. 
By  implication   it   is    fair  to  infer  that   it   was   contemplated   that 


144 


POWERS. 


the   Buckeye   Brewing   Company,    as   a   corporation,    should   con- 
tinue, for  the  purpose  of  collecting  the  interest  on  these  debenture 
bonds,  the  dividends  on  the  stock  of  the  new  corporation,  and  to 
distribute    the    same    among    the    shareholders    of    said    Buckeye 
Brewing  Company.     It  was  therefore  to  continue  its  business  as 
a  corporation,  not  for  the  purpose  of  carrying  out  the  objects  for 
which  it  was  organized,  viz.,  the  business  of  a  brewing  company, 
but  for  the  purpose  of  owning  stock  in  a  new  corporation,  and 
the  extent  that  the  ownership  of  such  stock  involved  participating 
in  the  management  of  that  corporation  it  was  to  assist  in  carry- 
ing on  the  business  of  another  corporation.     There  was  no  such 
exigency  in  the  business  of  this  corporation  as  to  make  such  sale 
of  its  property  and  change  in  the  nature  of  its  corporate  business 
necessary  for  the  protection  of  its  stockholders.     Counsel  for  the 
plaintiff  have  cited  many  cases  in  which  the  courts  of  several  of 
the  states,  under  statutes  very  similar  to  those  of  Ohio,  have  held 
that   corporations  had  a   right  to  own  and  control   the   stock   of 
other  corporations,  but  in  every  such  case  to  which  our  attention 
has  been  called  such  power  was  conceded  to  the  corporation  as 
incident   to    its    inherent    right   to   protect   its    shareholders    from 
loss,  owing  to  some  peculiar  exigency  in  the  affairs  of  the  corpo- 
ration.    An  insolvent  corporation,   contemplating  voluntary  disso- 
lution by  consent  of  its  shareholders,  might  have  a  right  to  dis- 
pose of  its   property,  and  accept,   in  whole,   or  in  part,    for  the 
purchase  price  thereof,  stock  in  another  corporation;  this  stock  to 
be  either  sold,  and  the  proceeds  thereof  distributed  to  the  cred- 
itors, or  to  be  apportioned  in  kind  to  such  creditors  or  stockhold- 
ers  as   the  terms   of  dissolution  might  provide.     A   receiver   ap- 
pointed to  manage  the  affairs  of  an  insolvent  corporation  and  to 
close  out  its  business  might  be  authorized  to  dispose  of  its  assets, 
and  receive  in  payment  therefor  stock  in  the  corporation,  to  be 
disposed   of  as  the  court  might  order  in  the  distribution   of   its 
assets.     But  in  all  these  cases  there  must  be  some  stringency  or 
emergency  to  justify  this  departure  from  the  ordinary  course  of 
the  business  of  the  corporation.     But  in  this  case  no  such  emer- 
gency  existed.     As   before   stated,   the   corporation   was   doing   a 
flourishing  business.     Its  plant  and  good  will  and  business  were 
considered  so   desirable   that   the  vendee  agreed   to  pay   therefor 
the  large  consideration  specified  in  the  contract.     This  sale  could 
undoubtedly   have   been   made    for   cash   and   deferred   payments. 
The  purchase  price  might  not  have  been  so  great  upon  such   a 
basis,  but  still  would  have  been  adequate.     As  no  emergency  ex- 
isted to  compel  this  sale,  and  the  transaction  was  purely  volun- 
tary on  the  part  of  the  corporation,   there  is  no  reason  why  it 
should  be  permitted  to  violate  the  well  settled  principles  of  law 
by    taking    stock    in    a    new    corporation,    and    thereby    enhancing 
the    consideration    which    it   was    to    receive.      Public    policy    dis- 
courages such  transactions.     As  the  supreme  court  of  Ohio  has 
well  said,  in  the  case  in  36  Ohio  St.,  above  referred  to: 


EASUN    V.    BUCKEYE    BREWING    CO,  I45 

"Were  this  not  so,  one  corporation,  by  buying  up  the  majority 
of  the  shares  of  the  stock  of  another,  could  take  the  entire  man- 
agement of  its  business,  however  foreign  such  business  might  be 
to  that  which  the  corporation  so  purchasing  said  shares  was 
created  to  carry  on.  A  banking  corporation  could  become  the 
operator  of  a  railroad,  or  carry  on  the  business  of  manufacturing, 
and  any  other  corporation  could  engage  in  banking  by  obtaining 
control  of  the  bank's  stock.  Xor  would  this  result  follow  any 
the  less  certainly  if  the  shares  of  stock  were  received  in  pledge 
only  to  secure  the  payment  of  a  debt,  provided  the  shares  were 
transferred  on  the  books  to  the  name  of  the  pledgee.  A  person 
in  whose  name  the  stock  of  the  corporation  stands  on  the  books 
of  the  corporation,  is  as  to  the  corporation,  a  stockholder,  and 
has  the  right  to  vote  upon  the  stock." 

All  these  objections  apply  with  full  force  to  the  transactions 
under  consideration  before  us.  There  is  no  reason  why  there 
should  be  a  departure  from  these  well-settled  rules  in  this  case. 
There  are  no  creditors  whose  interests  are  to  be  protected  by  up- 
holding this  sale.  There  are  no  unfortunate  shareholders'  who 
are  liable  to  be  assessed  for  unpaid  debts  under  the  statutes  of 
the  state.^  There  was,  in  fact,  no  emergency  to  justify  any  such 
unauthorized  transactions  on  the  part  of  the  Buckeye  Brewing 
Company.  The  plaintiff  does  not  sustain  such  a  reladon  to  this 
contract  as  entitles  him  to  any  exemption  from  the  application 
of  these  principles  of  law.  He  must  be  held  to  have  dealt  with 
this  corporation  with  knowledge  of  its  corporate  powers.  They 
were  such  as  were  conferred  by  the  laws  of  Ohio,  of  which  he  had 
the  same  notice  as  the  defendant  and  all  persons  dealing  with  it. 
The  want  of  power  on  the  part  of  defendant  to  make  such  a  con- 
tract prevents  the  plaintiff  from  either  enforcing  it  in  an  action 
for  specific  performance  or  recovering  damages  for  its  breach. 
Coppin  V.  Greenlees  &  Ransom  Co.,  38  Ohio  St.  275.  For  the 
reason  stated  we  think  the  contract  ultra  vires.  It  cannot,  there- 
fore, be  enforced,  and  this  proceeding  must  fail.  The  other 
grounds  insisted  upon  in  the  demurrer  it  will  not  be  necessary  to 
notice.  The  demurrer  must  be  sustained,  and  the  petition  dis- 
missed. 


10 — Prf^.^te  Corp. 


CHAPTER  VII. 

THE  DOCTRINE   OF    ULTRA   VIRES   AND   ITS   APPLICATION. 

JEMISON  V.  CITIZENS'  SAVINGS  BANK. 

1890.     122  N.  Y.  135,  25  N.  E.  264,  9  L.  R.  A.  708,  19  Am.  St. 

482. 

Appeal  from  a  judgment  in  favor  of  defendant. 

HAIGHT,  J.:  The  plaintiffs  were  commission  merchants  and 
members  of  the  Cotton  Exchange  of  the  city  of  New  York.  The 
defendant  was  a  savings  bank  and  trust  corporation  organized 
imder  the  laws  of  Texas. 

This  action  was  brought  to  recover  commissions,  and  for  money 
claimed  to  have  been  expended  for  the  defendant  on  the  purchase 
and  sale  of  cotton  futures. 

The  defense  was  that  the  defendant,  as  a  savings  bank  and  trust 
corporation,  had  no  power  or  authority  to  deal  in  the  purchase 
and  sale  of  cotton  for  future  delivery,  or  in  contracts  for  the 
purpose  of  speculation;  that  in  the  transaction  alleged  in  the  com- 
plaint it  acted  as  the  agent  of  one  Albert  P.  Clopton,  of  Jefferson, 
Texas,  and  that  the  fact  that  he  was  the  principal  for  whom  the 
defendant  acted  was  disclosed  and  well  known  to  the  plaintiffs 
prior  to  the  time  of  the  transaction  referred  to. 

Whilst  the  fact  distinctly  appears  from  the  correspondence  be- 
tween the  parties  that  the  defendant  was  acting  for  "good  re- 
sponsible customers,"  the  General  Term  was  of  the  opinion  that 
this  defense  could  not  be  sustained  for  the  reason  that  the  defend- 
ant did  not  disclose  the  name  of  its  principal  at  the  time  of  the 
giving  of  the  orders  complained  of  for  the  purchase  and  sale  of 
cotton  futures.  Had  this  defense  been  sustained,  the  principal 
and  not  the  defendant,  his  agent,  would  have  been  liable.  With- 
out stopping  to  consider  the  evidence  we  shall  assume  that  this 
defense  was  not  established,  and  proceed  to  consider  the  question 
as  to  whether  the  defendant  was  liable  as  principal. 

Transactions  between  the  parties  commenced  in  January,  1879, 
by  a  letter  from  J.  H.  Parsons,  as  cashier  of  the  defendant,  asking 
the  plaintiffs  the  amount  of  margin  and  commission  they  required 
for  the  purchase  of  cotton  futures.  The  plaintiffs  answered,  giv- 
ing the  amount,  and  this  was  followed  by  an  order  by  telegraph 
from  Parsons,  as  cashier,  under  date  of  February  10,  to  buy  100 
bales,  June  delivery,  and  on  the  same  day  he  wrote  the  plaintiffs 
that  the  order  was  made  for  one  of  their  customers  who  had  de- 
posited $250,  as  per  their  favor  of  the  twenty-seventh  ult.     Other 

146 


JEMISOX    V.    citizens'    SAVINGS    BANK.  147 

orders  followed,  the  final  result  of  which  was  a  loss,  to  recover 
which  this  action  was  brought.  At  the  time  Parsons  was  the 
cashier  of  the  defendant,  possessing  the  powers  and  duties  inci- 
dent to  the  office  under  the  charter,  constitution  and  by-laws,  hav- 
ing the  general  charge  of  the  business  of  the  bank  and  the  super- 
vision of  the  concern,  and  inasmuch  as  the  answer  alleges  that 
the  transactions  referred  to  in  the  complaint  were  had  between 
the  plaintiffs  and  the  defendant  acting  as  agent,  we  shall  treat 
him  as  possessing  all  of  the  authority  to  act  in  the  premises  that 
the  directors  of  the  defendant  had  the  power  to  give.     *     *     * 

Whilst  the  buying  and  selling  of  cotton  to  be  delivered  in  the 
future,  may  not  ordinarily  be  immoral  or  prohibited  by  any  stat- 
ute, it  is  not  included  in  the  powers  given  to  the  defendant  by 
its  charter.  The  transaction  in  question  was  prejudicial  to  its 
stockholders  and  tended  to  endanger  and  destroy  the  safeguards 
provided  for  the  depositors.  The  stockholders  and  depositors  had 
the  right  to  have  their  funds  invested  in  accordance  with  the  pro- 
visions of  the  charter  and  the  Constitution  and  laws  of  the  state, 
and  in  so  far  as  this  right  was  violated  by  the  transaction  in  ques- 
tion it  was  a  misappropriation  of  the  funds  and  immoral. 

It  is  contended  that  the  defense  of  ultra  vires  is  not  available 
in  this  case,  for  the  reason  that  the  contract  had  been  executed 
on  the  part  of  the  plaintiffs  and  that  the  defendant  is  estopped 
from  setting  up  the  defense.  In  the  case  of  Whitney  Arms  Co. 
V.  Barlow  (63  N.  Y.  62),  the  plaintiff  was  a  corporation  organ- 
ized for  the  purpose  of  manufacturing  every  variety  of  firearms 
and  other  implements  of  war.  and  all  kinds  of  machinery  adapted 
to  the  construction  thereof.  It  entered  into  a  contract  with  the 
American  Seal  Lock  Company  to  manufacture  and  deliver  10.000 
locks.  The  locks  having  been  delivered,  it  was  held  that  the  con- 
tract was  fully  executed  and  that  the  plea  of  ultra  vires  would 
not  prevail  as  a  defense  to  an  action  brought  to  recover  the  con- 
tract price.  We  do  not  question  the  rule  thus  invoked.  It  has 
been  repeatedly  declared  in  other  cases,  as,  for  instance,  in  Parish 
v.  \\''heeler  {22  X.  Y.  494),  in  which  it  was  held  that  a  railroad 
company  having  purchased  and  received  a  steamboat  could  be 
compelled  to  pay  for  it,  although  the  power  to  purchase  such  boat 
was  not  included  in  its  charter.  But  this  doctrine  has  no  appli- 
cation to  executory  contracts  which  are  sought  to  be  made  the 
foundation  of  an  action,  or  to  contracts  that  are  prohibited  as 
against  public  policv  or  immoral.  (Nassau  Bank  v.  lones,  supra; 
P.  C.  &  S.  L.  R.  Co.  V.  K.  &  H.  B.  Co.,  131  U.  S.  ■371-389.) 

In  the  case  at  bar.  the  transaction  as  we  have  seen  was  not  only 
immoral  and  in  violation  of  the  rights  of  the  stockholders  and 
depositors,  but  the  defendant  had  received  nothing  by  virtue  of  it. 
The  cotton  had  been  purchased  by  the  plaintiff?  in  their  own 
name,  they  taking  title  thereto  and  holding  it  upon  the  defendant's 
account.  It  was  purchased  under  the  rules  of  the  Cotton  Ex- 
change  of   the   city   of   New  York   in   which   the   members   doing 


148  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION, 

business  therein  with  other  members  act  as  principals  and  are 
hable  as  such.  The  most  that  can  be  claimed  is  that  they  held  the 
cotton  or  the  contracts  therefore  subject  to  the  call  or  order  of 
the  defendant.  There  had  been  no  delivery  of  any  cotton  or  prop- 
erty of  any  kind,  or  transfer  of  any  title  to  such  property  to  the 
defendant.  If  the  steamboat  had  never  been  delivered  to  the  rail- 
road company  so  as  to  transfer  the  title  thereto,  or  if  the  10,000 
locks  had  never  been  delivered  to  the  American  Seal  Lock  Com- 
pany, very  different  questions  would  have  been  presented  in  the 
cases  to  which  we  have  called  attention.  We  consequently  are  of 
the  opinion  that  under  the  circumstances  of  this  case  the  defense 
of  ultra  vires  is  still  available  to  the  defendant. 

The  claim  is  made  on  behalf  of  the  appellants  that  the  defend- 
ant, in  making  the  orders,  acted  as  an  agent  for  an  undisclosed 
principal,  and  is,  therefore,  liable  as  such.  If  the  defendant  had 
no  power  to  engage  in  the  business  as  principal  we  do  not  under- 
stand what  right  it  had  to  do  so  as  an  agent,  but  conceding  that 
it  was  an  agent  and  that  the  orders  were  made  for  and  on  behalf 
of  Clopton,  then  this  action  should  have  been  brought  against 
Clopton  instead  of  the  defendant.  But  it  is  claimed  that  the 
defendant  neglected  to  disclose  its  principal  at  the  time  of  mak- 
ing the  orders  and  for  that  reason  it  is  liable ;  but  if  it  neglected 
to  disclose  its  principal,  so  far  as  this  action  with  the  plaintiffs  is 
concerned,  it  must  be  regarded  as  principal  and  liable  as  such,  and 
if  a  principal  then  the  question  of  ultra  vires  arises.  The  plain- 
tiffs cannot  sustain  their  action  upon  the  two  theories,  for  they 
lead  in  different  directions.  They  cannot  proceed  upon  the  theory 
that  the  defendant  was  an  agent,  for  the  purpose  of  avoiding 
the  question  of  ultra  vires,  and  then  upon  the  theory  that  the 
defendant  was  a  principal,  for  the  purpose  of  establishing  a  right 
to  recover.  Undoubtedly  a  person  may  in  fact  be  an  agent  and 
still  bind  himself  as  a  principal,  but  if  he  is  proceeded  against  as 
a  principal  he  is  entitled  to  all  of  the  rights  and  privileges  that 
the  law  gives  to  a  person  occupying  that  position. 

We  consequently  are  of  the  opinion  that  the  judgment  should 
be  affirmed,  with  costs. 


BATH  GAS  LIGHT  CO.  v.  CLAFFY. 

1896.     151   N,  Y,  24,  45  N.  E.  390,  36  L.  R.  A.  664.^ 

Appeal  from  a  judgment  of  the  General  Term  of  the  Supreme 
Court   in  the  second  judicial   department,   entered   December    13, 

*  Plaintiff  insured  against  damage  by  hail  in  a  corporation  authorized 
to  insure  "against  loss  or  casualty  by  fire  or  lightning."  A  loss  oc- 
curred. The  corporation  denied  liability.  Held,  plaintiff  could  recover. 
Denver  Fire  Ins.  Co.  v.  McClelland  (1885),  9  Colo.  11,  9  Pac.  771.  But 
see  Re  Phoenix  Life  Assurance  Co.  (1862),  2  Johns.  &  Hemm.  441; 
Miller  V.  Insurance  Co.   (1893),  92  Tenn.  167,  21  S.  W.  39.— Ed. 


BATH    GAS   LIGHT    CO   V.    CLAFFY.  I49 

1893,  which  affirmed  a  judgment  in  favor  of  plaintiff  entered  upon 
a  decision  of  the  court  on  trial  at  Circuit,  a  jury  having  been 
waived. 

The  nature  of  the  action  and  the  facts,  so  far  as  material,  are 
stated  in  the  opinions. 

ANDREWS,  Ch.  J. — A  brief  statement  of  the  material   facts 
will  present  the  important  questions  arising  upon  this  appeal. 

The  plaintiff  is  a  Maine  corporation  created  under  a  special 
law  of  that  state,  passed  in  1853,  for  the  purpose  of  supplying 
gas  for  the  lighting  of  the  streets  and  buildings  in  the  city  of 
Bath.  The  United  Gas,  Fuel  and  Light  Company  is  also  a  Elaine 
corporation,  organized  in  1888,  under  a  general  law,  by  the  exe- 
cuting and  filing  of  a  certificate,  which  in  pursuance  of  the  law 
of  Maine  was  first  submitted  to  and  approved  by  the  attorney- 
general,  who  certified  that  it  was  conformable  to  the  Constitution 
and  law^s  of  that  state.  The  certificate,  among  other  things,  speci- 
fied that  the  corporation  was  organized  to  "manufacture,  lease, 
purchase  and  otherwise  acquire,  deal  in,  manage,  use  and  sell  any 
and  all  machinery,  fixtures,  appurtenances,  appliances  and  plants 
for  using  and  furnishing  light,  heat  and  power,  and  for  any  and 
all  purposes  for  which  gas  is  now  used."  The  plaintiff  under  its 
charter  established  a  plant,  and  at  the  time  of  the  execution  of 
the  lease  now  to  be  mentioned  was  engaged  in  supplying  the 
streets  and  buildings  in  Bath  with  gas  for  lighting  and  other  pur- 
poses. On  the  loth  day  of  November,  1888,  it  executed  to  the 
United  Gas.  Fuel  and  Light  Company  a  lease  of  its  property  and 
franchises  for  the  term  of  twenty-five  years  from  November  i, 
1888.  at  an  annual  rent  of  $2,500.  which  the  lessee  covenanted  to 
pay  in  semi-annual_  payments  on  the  first  day  of  May  and  the  first 
day  of  November  in  each  year,  and  also  the  taxes  assessed  during 
the  term.  Provision  was  made  for  the  payment  by  the  lessor 
to  the  lessee,  at  the  expiration  of  the  term,  of  the  value  of  any 
improvements  or  extensions  made  by  the  lessee,  and  it  was  also 
provided  that  the  lessee  should  give  to  the  lessor  a  satisfactory 
bond  for  the  faithful  performance  by  the  lessee  of  its  covenants 
in  the  lease.  In  pursuance  of  the  provision  last  mentioned,  the 
United  Gas.  Fuel  and  Light  Company,  on  the  same  dav.  executed 
a  bond  wath  the  defendants  John  Claffy  and  John  T.  Rowland  as 
sureties,  conditioned  for  the  faithful  performance  by  the  companv 
of  the  covenants  in  its  behalf  contained  in  the  lease,  which  bond 
was  delivered  to  and  accepted  by  the  plaintiff.  The  sureties  were 
interested  in  the  L^nited  Gas,  Fuel  and  Light  Company  as  stock- 
holders, and  _  Claffy  (the  appellant)  was  also  a  director.  The 
lessee  immediately,  upon  the  execution  of  the  lease,  entered  into 
possession  of  the  demised  property  and  paid  the  rent  up  to  the 
1st  day  of  November.  1880.  but  defaulted  in  the  semi-annual  pay- 
ment due  INTay  i,  i8qo.  and  on  the  2d  day  of  August,  1890  (the 
rent  remaining  unpaid),  the  plaintiff  re-entered  and  took  posses- 


150  THE  DOCTRINE  OF  ULTRA  VIRES   AND   ITS  APPLICATION. 

sion  of  the  demised  property  under  a  provision  of  the  lease  which 
authorized  the  lessor  to  enter  and  expel  the  lessee  on  failing  to 
pay  rent.  The  entry  also  was,  as  may  be  inferred,  with  the  con- 
sent and,  indeed,  at  the  suggestion  of  the  officers  of  the  lessee. 
This  action  was  brought  on  the  bond  against  the  lessee  and  the 
sureties  to  recover  as  damages  the  rent  which  fell  due  May  i, 
1890,  and  the  proportionate  rent  from  that  date  up  to  August  2, 
1890,  and  taxes  which  had  been  assessed  against  the  property 
during  its  occupation  by  the  lessee,  which  it  had  failed  to  pay. 

The  defendant  Claffy  alone  appeared  and  defended  the  action. 
His  sole  defense  to  the  general  claim  is  that  the  lease  was  ultra 
vires,  illegal  and  void,  because  (as  is  conceded)  it  was  made  with- 
out legislative  sanction.  If  the  court  is  compelled  to  accede  to  this 
contention  by  force  of  controlling  authority,  or  from  considera- 
tions of  public  policy  which  overbear  in  the  particular  case  the 
rules  of  ordinary  justice,  it  will  be  our  duty  so  to  declare  and  to 
say  that,  although  the  United  Gas,  Fuel  and  Light  Company 
received  and  enjoyed  the  undisturbed  possession  of  the  demised 
property  under  the  lease  until  the  re-entry,  and  accepted  and 
appropriated  the  benefit  of  the  contract,  nevertheless,  when  called 
upon  to  pay  the  rent  which  accrued  during  its  occupation,  it  may 
defend  itself  on  the  ground  that  the  plaintiff,  in  making  the  lease, 
exceeded  its  power  and  escape  the  performance  of  its  obligation, 
and,  further,  that  the  defendant  Claffy  may,  for  a  like  reason, 
avoid  his  guaranty. 

The  modern  doctrine,  as  stated  by  Chancellor  Kent,  is  to  con- 
sider corporations  as  having  such  powers  as  are  specifically 
granted  by  the  act  of  incorporation,  or  as  are  necessary  for  the 
purpose  of  carrying  into  effect  the  powers  expressly  granted,  and 
as  not  having  any  others.  (2  Kent  Comm.  299.)  This  doctrine 
is  embodied  in  the  Revised  Statutes  of  New  York,  and  the  section 
relating  to  the  subject  is  regarded  as  simply  declaratory  of  the 
antecedent  law.     (i  Rev.  St.  600,  §  3.)     *     *     * 

The  modern  and  reasonable  doctrine  that  contracts  into  which 
corporations  may  lawfully  enter  are  such  only  as  are  expressly  or 
impliedly  authorized  by  their  charters,  is  nevertheless  frequently 
disregarded  in  practice,  and  when  this  is  done  and  a  corporation 
enters  into  a  contract  beyond  its  chartered  powers,  the  question 
arises  which  has  been  the  subject  of  debate  and  of  much  differ- 
ence of  opinion,  how  shall  such  a  contract  be  treated  by  the  courts, 
and  whether  the  contract  can  create  any  rights  as  between  the 
parties  which  the  courts  will  enforce.  There  are  some  proposi- 
tions pertaining  to  the  general  subject  which  are  beyond  dispute. 
One  is,  that  a  contract  by  a  corporation  to  do  an  immoral  thing, 
or  for  any  immoral  purpose,  or,  to  use  a  convenient  expression, 
a  contract  malum  in  se,  is  void  and  gives  no  right  of  action.  The 
doctrine,  however,  is  not  peculiar  to  contracts  of  corporations. 
It  has  its  root  in  the  universal  principle  that  persons  shall  not 
stipulate  for  iniquity.     Another  principle  of  general  recognition  is 


BATH  GAS  LIGHT  CO  V.  CLAFFY.  I5I 

that  a  corporation  cannot  enter  into  or  bind  itself  by  a  contract 
which  is  expressly  prohibited  by  its  charter  or  by  statute,  and  in 
the  appHcation  of  this  principle  it  is  immaterial  that  the  contract, 
except  for  the  prohibition,  would  be  lawful.  No  one  is  permitted 
to  justify  an  act  which  the  legislature  within  its  constitutional 
power  has  declared  shall  not  be  performed.  The  series  of  cases 
in  this  state,  known  as  the  Utica  insurance  cases,  afford  an  apt 
illustration.  It  was  held  that  the  restraining  acts  which  prohibited 
the  exercise  of  banking  powers,  including  the  discount  of  paper,  by 
other  than  banking  corporations,  rendered  void  securities  taken 
on  such  discount  by  corporations  not  possessing  banking  powers, 
and  this,  although  the  object  of  the  restraining  laws  seems  to  have 
been  the  protection  of  the  chartered  banks  in  the  monopoly  of 
banking. 

But  in  not  infrequent  instances  corporations  enter  into  unau- 
thorized contracts,  which  are  neither  mala  in  se  nor  mala  pro- 
hibita,  or  when  the  only  prohibition  or  restriction  is  implied  from 
the  grant  of  specified  powers.  It  is  this  class  of  cases  which  open 
the  field  of  controversy.  Is  such  a  contract  performed  by  one 
party,  but  not  performed  by  the  other,  void  as  between  them  to 
all  intents  and  purposes,  so  that  no  recovery  can  be  had  under 
it  against  the  party  who  has  received  the  consideration  for  his 
promise,  but  neglects  or  refuses  to  perform  it,  or  is  it  so  tainted 
with  illegality  that  the  courts  must  refuse  to  recognize  it  under 
any  circumstances  or  enforce  its  obligation,  whether  as  to  past  or 
future  transactions?  There  are  certain  English  cases  which  are 
relied  upon  by  those  who  maintain  the  strict  view  that  contracts 
of  corporations  ultra  vires  are  under  no  circumstances  enforceable 
in  the  courts. 

(The  learned  judge  proceeded  to  discuss  and  distinguish  the 
English  decisions.) 

The  Supreme  Court  of  the  United  States  seems  to  be  committed 
to  a  construction  of  the  doctrine  of  ultra  vires  which  w^ould  sus- 
tain the  defense  in  the  case  now  before  us.  Several  cases  have 
arisen  in  that  court  upon  leases  of  railroads  made  without  legis- 
lative sanction,  in  which  it  has  been  held  that  such  leases  are  void 
as  between  the  parties,  and  that  no  action  can  be  maintained 
thereon  to  recover  the  rent  reserved,  even  during  the  occupation 
by  the  lessee  under  the  lease. 

(The  learned  judge  then  considered  the  leading  Federal  de- 
cisions.) 

W'e  concede  that  a  railroad  or  other  corporation  invested  with 
powers  in  the  exercise  of  which  the  public  have  an  interest,  and 
empowered  by  reason  of  its  quasi  public  character  to  do  acts  and 
exercise  privileges  peculiar  and  exceptional  to  enable  it  to  dis- 
charge its  public  duties,  cannot,  as  against  the  public,  abdicate  its 
functions  or  absolve  itself  from  the  performance  of  such  duties 
through  an  unauthorized  transfer  of  its  property  and  franchises 
to  another  body  or  corporation.     We  have  so  held  in  the  case  of 


152  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION. 

Abbott  V.  The  Johnstown,  etc.,  Railroad  Co.  (80  N.  Y.  27), 
where  it  was  decided  that  a  railroad  corporation  which,  without 
legal  sanction,  had  leased  its  road,  was  not  thereby  exempted 
from  liability  as  carrier  to  a  passenger  injured  by  negligence  dur- 
ing the  operation  of  the  road  under  the  lease. 

There  are  obvious  reasons  of  propriety  and  public  policy,  the 
prevention  of  monopolies,  among  others,  aside  from  the  mere 
question  of  capacity  under  their  charters,  which  enforce  the  now 
well-settled  doctrine,  that  leases  by  such  quasi  public  corporations, 
to  be  valid  and  effectual,  must  be  authorized  by  statute.  But 
where,  as  in  the  present  case,  such  an  unauthorized  lease  has  been 
made,  and  the  lessee  has  received  and  enjoyed  the  possession  of 
the  property  under  the  lease,  is  there  any  public  policy  which 
requires  that  the  lessee  should  be  permitted  to  escape  the  obliga- 
tion imposed  by  the  contract  to  pay  the  rent  reserved  during  the 
enjoyment  of  the  property?  It  is  doubtless  true,  as  has  been 
suggested,  that  the  corporation  in  such  cases  cannot,  without  the 
consent  of  the  state,  change  its  obligations  to  the  state  or  the 
public,  and  discharge  itself  from  its  public  duties.  But  the  law 
affords  ample  remedy  for  the  usurpation  by  corporations  of  un- 
authorized powers,  through  proceedings  by  injunction  or  for  the 
forfeiture  of  their  charters.  If  a  lease  by  a  corporation,  made  in 
excess  of  its  powers  and  without  legislative  sanction,  is  illegal  in 
the  ordinary  and  proper  sense  of  the  term,  it  may  be  properly 
conceded  that  no  action  could  be  maintained  upon  it.  The  lessee, 
when  sued  for  the  rent,  could  set  up  the  illegality  of  the  contract, 
and  the  defense  would  prevail,  however  inequitable  the  defense 
might  be.  But  the  term  "illegal,"  which  is  frequently  used  to 
describe  a  contract  made  by  a  corporation  in  excess  of  its  cor- 
porate powers,  in  most  cases  means  simply  that  the  contract  is 
unauthorized,  or  one  which  the  corporation  had  no  legal  capacity 
to  make.  Such  a  contract  may  be  illegal  in  the  true  and  proper 
sense,  but  it  may  also  be  one  involving  no  moral  turpitude  and 
offending  against  no  express  statute.  The  inexact  and  misleading 
use  of  the  word  "illegal,"  as  applied  to  contracts  of  corporations, 
ultra  vires  only,  has  been  frequently  alluded  to.  (Comstock,  C. 
J.,  Bissell  V.  M.  S.  Railroad  Co.,  22  N.  Y.  268;  Archibald,  J., 
Riche  V.  Ashbury  Railway  Carriage  Co.,  L.  R.  [9  Exch.]  293; 
Lord  Cairns,  S.  C.  on  appeal,  L.  R.    [7  Eng.  &  Ir.  App.]   672.) 

The  lease  now  in  question  was  not  in  any  true  sense  of  the 
word  illegal.  It  was  imdoubtedly  void  as  against  the  state.  The 
parties  to  the  lease  assumed  it  to  be  valid.  It  was  contemplated, 
as  the  provisions  of  the  lease  show,  that  the  lessee  would  continue 
and  extend  the  business  before  carried  on  by  the  plaintiff,  and  it 
is  not  suggested  that  it  did  not,  during  its  occupation,  discharge 
all  the  obligations  to  the  public  which  rested  upon  the  plaintiff. 
The  state  has  not  intervened,  and  the  possession  of  the  property 
has  now  been  restored  to  its  original  proprietors.  The  contract 
has  been  terminated  as  to  the  future,  and  all  that  remains  undone 


BATH    GAS   LIGHT   CO  V.    CLAFFY.  1 53 

is  the  payment  by  the  lessee  of  the  unpaid  rent.  We  think  the 
demands  of  pubHc  poHcy  are  fully  satisfied  by  holding  that,  as  to 
the  public,  the  lease  was  void,  but  that,  as  between  the  parties, 
so  long  as  the  occupation  under  the  lease  continued,  the  lessee 
was  bound  to  pay  the  rent,  and  that  its  recovery  may  be  enforced 
by  action  on  the  covenant.  Public  policy  is  promoted  by  the  dis- 
couragement of  fraud  and  the  maintenance  of  the  obligation  of 
contracts,  and  to  permit  a  lessee  of  a  corporation  to  escape  the 
payment  of  rent  by  pleading  the  incapacity  of  the  corporation  to 
make  the  lease,  although  he  has  had  the  undisturbed  enjoyment 
of  the  property,  would  be,  we  think,  most  inequitable  and  unjust. 
It  has  been  suggested,  to  avoid  the  apparent  injustice  which  would 
result  from  holding  that  there  could  be  no  recovery  on  the  con- 
tract for  past-due  rent,  that  there  might  be  a  remedy  on  an  im- 
plied contract  to  pay  the  value  of  the  use  of  the  property.  But 
if  the  express  contract  was  illegal  in  a  proper  sense,  and  the  par- 
ties to  the  lease  were  guilty  of  a  public  wrong,  so  as  to  preclude 
a  court  of  equity  to  entertain  jurisdiction  on  the  application  of  a 
lessor  to  be  relieved  from  the  lease  and  to  be  restored  to  the  pos- 
session of  the  leased  property,  as  was  held  in  the  case  of  The 
St.  Louis,  v.  &  T.  H.  Railroad  Co.  v.  Terre  Haute  &  I.  Railroad 
Co.  (145  U.  S.  393),  then  surely  it  would  be  a  mere  evasion  and 
would  be  inconsistent  with  legal  principles  for  the  court  to  imply 
a  contract  from  the  occupation  under  the  illegal  lease  to  relieve 
the  wrongdoer  from  the  dilemma  into  which  he  had  voluntarily 
placed  himself.  We  think  the  rule  which  should  be  applied  is 
that  the  lessee  is  bound  by  the  contract  so  long  as  he  remains  in 
possession. 

It  is  unnecessary  now  to  determine  whether  a  lessee  under  an 
ultra  vires  lease  may  relieve  himself  from  liability  in  the  future 
by  abandoning  the  possession  and  restoring,  or  offering  to  restore, 
it  to  the  lessor. 

The  courts  in  this  state  from  an  early  day,  commencing  as  far 
back  as  the  Utica  Insurance  cases,  have  sought  to  regulate  and 
restrict  the  defense  of  ultra  vires  so  as  to  make  it  consistent  with 
the  obligations  of  justice.  (Utica  Ins.  Co.  v.  Scott,  19  John,  i  ; 
Curtis  v.  Leavitt,  15  N.  Y.  9;  Bissell  v.  M.  S.  Railroad  Co..  22 
id.  260,  Op.  Comstock,  C.  J. ;  Parish  v.  A\'heeler,  id.  495 ;  ^^^litney 
Arms.  Co.  v.  Barlow,  63  id.  62;  Pratt  v.  Short,  79  id.  437;  Wood- 
ruff V.  Erie  Railway  Co.,  93  id.  609;  Starin  v.  Edson,  112  id. 
206.)  The  case  of  Woodruff  v.  Erie  Railway  (supra)  is  very 
much  in  point  in  the  present  controversy.  It  was  there  held  that 
the  lessee  of  a  railroad  could  not  resist  the  payment  of  rent  which 
accrued  during  its  occupation  under  the  lease  on  the  ground  that 
the  lessor's  title  was  derived  under  an  ultra  vires  transaction. 
Our  conclusion,  therefore,  is  that  the  main  question  was  properly 
decided  against  the  defendant.  It  is  said,  however,  that  the  con- 
tract was  a  IVIaine  contract,  and  that  by  the  law  of  that  state  the 
lease  was  illegal  and  void  and  no  action  could  be  maintained  upon 


154  THE  DOCTRINE  OF  ULTRA  VIRES   AND  ITS  APPLICATION. 

it.  It  is  a  sufficient  answer  to  this  claim  that  the  law  of  Maine 
on  the  subject  does  not  appear  by  the  record,  and  that  it  is  the 
duty  of  this  court,  therefore,  to  determine  the  case  according  to 
the  law  of  New  York  as  established,  or  in  the  absence  of  con- 
trolling authority,  as  justice  having  regard  to  all  interests  may 
seem  to  the  court  to  require. 

The  question  as  to  the  liability  of  the  defendant  for  the  taxes 
assessed  in  1890  was,  we  think,  correctly  adjudged. 

Finding  no  error  in  the  record  the  judgment  should  be  affirmed. 

All  concur  with  Andrews,  Ch.  J.,  except  Vann,  J.,  dissenting. 

Judgment  affirmed. 


CENTRAL  TRANSPORTATION  CO.  v.  PULLMAN'S 

PALACE  CAR  CO. 

1890.     139  U.  S.  24,  35  L.  ed.  55,  II  Sup.  Ct.  478.^ 

Action  of  covenant  by  the  Central  Transportation  Co.,  a  cor- 
poration of  Pennsylvania,  against  Pullman's  Palace  Car  Co.,  a 
corporation  of  Illinois,  to  recover  the  sum  of  $198,000,  due  for 
the  last  three-quarters  of  the  year  ending  July  i,  1886,  according 
to  the  terms  of  an  indenture  of  lease  from  the  plaintiff  of  all  its 
personal  property  to  the  defendant,  dated  February  17,   1870. 

The  plaintiff  was  originally  organized  under  the  general  laws  of 
Pennsylvania,  which  provided  for  the  incorporation  of  companies 
'■for  the  purpose  of  carrying  on  the  manufacture  of  woolen,  cot- 
ton, flax  or  silk  goods,  or  of  iron,  paper,  lumber  or  salt,"  or  "for 
the  manufacture  of  articles  from  iron  and  other  metals,  or  out  of 
wood,  iron  and  other  metals." 

The  plaintiff's  certificate  of  incorporation  stated  the  object  for 
which  it  was  formed  to  be  "the  transportation  of  passengers  in 
railroad  cars  constructed  and  to  be  owned  by  the  said  company 
in   accordance  with   the  several   letters   patent,"   which  it  owned. 

By  special  act  of  the  legislature  subsequently  passed,  the  char- 
ter of  the  company  was  extended  and  it  was  "empowered  to  enter 
into  contracts  with  corporations  of  this  or  any  other  state  for  the 
leasing  or  hiring  and  transfer  to  them,  or  any  of  them  of  their 
railway  cars  and  other  personal  property." 

The  defendant  was  incorporated  under  a  special  act  of  the  leg- 
islature of  Illinois  "to  manufacture,  construct  and  purchase  rail- 
way cars,  with  all  convenient  appendages  and  supplies  for  persons 
traveling  therein  and  the  same  to  sell  or  use  or  permit  to  be  used, 
in  such  manner  and  upon  such  terms  as  the  said  company  may 
think  fit  and  proper." 

On  February  17,  1870,  an  indenture  of  lease  was  entered  into 
between   the   two   companies   whereby   the   plaintiff   leased   all   its 

*  Statement   abridged.      Portions    of   opinion    omitted. — Ed. 


CENTRAL  TRANSP.  CO  V.  PULLMAN 's  PALACE  CAR  CO.     1 55 

sleeping  cars  with  their  equipment,  its  contracts,  its  patent  rights 
and  all  its  other  "personal  property,  rights,  credits,  moneys  and 
effects,"  etc.,  to  the  defendant  for  the  term  of  ninety-nine  years, 
covenanting  further  not  to  "engage  in  the  business  of  manufac- 
turing, using  or  hiring  sleeping  cars,"  during  the  said  term. 

The  defendant,  on  its  part,  covenanted  inter  alia  to  pay  to  plain- 
tiff annually  the  sum  of  $264,000. 

At  the  trial,  plaintiff  offered  evidence  tending  to  show  that  the 
defendant  had  entered  into  possession  of  plaintiff's  property  under 
the  lease,  and  had  continued  in  possession  during  the  period  set 
forth  in  the  declaration.  Defendant's  objection  to  this  evidence, 
"on  the  ground  that  it  was  beyond  the  power  of  either  corporation 
to  make  the  contract,"  was  sustained,  and  plaintiff  excepted.  De- 
fendant's motion  for  a  non-suit  was  granted  and  from  the  judg- 
ment entered  thereon  plaintiff  appeals. 

MR.  JUSTICE  GRAY,  after  stating  the  case  as  above,  deliv- 
ered the  opinion  of  the  court. 

The  principal  defense  in  this  case,  duly  made  by  the  defendant, 
by  formal  plea,  as  well  as  by  objection  to  the  plaintiff's  evidence, 
and  sustained  by  the  Circuit  Court,  was  that  the  indenture  of  lease 
sued  on  was  void  in  law,  because  beyond  the  powers  of  each  of 
the  corporations  by  and  between  whom  it  was  made.     *     *     * 

It  was  therefore  rightly  assumed  by  the  counsel  of  both  parties 
at  the  argument  that  the  only  question  to  be  determined  is  of  the 
correctness  of  the  ruling  sustaining  the  defense  of  ultra  vires, 
independently  of  the  form  in  which  that  question  was  presented 
and  disposed  of. 

Upon  the  authority  and  the  duty  of  a  corporation  to  exercise 
the  powers  granted  to  it  by  the  legislature,  and  those  only ;  and 
upon  the  invalidity  of  any  contract,  made  beyond  those  powers, 
or  providing  for  their  disuse  or  alienation ;  there  is  no  occasion 
to  refer  to  decisions  of  other  courts,  because  the  judgments  of 
this  court,  especially  those  delivered  in  the  last  twelve  years,  by 
the  late  Mr.  Justice  Miller,  aft'ord  satisfactory  guides  and  ample 
illustrations. 

(The  learned  judge  proceeded  to  consider  these  decisions  in 
detail.) 

The  clear  result  of  these  decisions  may  be  summed  up  thus : 
The  charter  of  a  corporation,  read  in  the  light  of  any  general 
laws  which  are  applicable,  is  the  measure  of  its  powers,  and  the 
enumeration  of  those  powers  implies  the  exclusion  of  all  others 
not  fairly  incidental.  All  contracts  made  by  a  corporation  beyond 
the  scope  of  those  powers  are  unlawful  and  void,  and  no  action 
can  be  maintained  upon  them  in  the  courts,  and  this  upon  three 
distinct  grounds :  the  obligation  of  every  one  contracting  with  a 
corporation,  to  take  notice  of  the  legal  limits  of  its  powers ;  the 
interest  of  the  stockholders,  not  to  be  subjected  to  risks  which 
they  have  never  undertaken;  and,  above  all.  the  interest  of  the 


156  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION. 

public,  that  the  corporation  shall  not  transcend  the  powers  con- 
ferred upon  it  by  law.  A  corporation  cannot,  without  the  assent 
of  the  legislature,  transfer  its  franchise  to  another  corporation, 
and  abnegate  the  performance  of  the  duties  to  the  public,  imposed 
upon  it  by  its  charter  as  the  consideration  for  the  grant  of  its 
franchise.  Neither  the  grant  of  a  franchise  to  transport  passen- 
gers, nor  a  general  authority  to  sell  and  dispose  of  property,  em- 
powers the  grantee,  while  it  continues  to  exist  as  a  corporation, 
to  sell  or  to  lease  its  entire  property  and  franchise  to  another 
corporation.  These  principles  apply  equally  to  companies  incor- 
porated by  special  charter  from  the  legislature,  and  to  those 
formed  by  articles  of  association  under  general  laws. 

*  *  *  The  plaintiff,  therefore,  was  not  an  ordinary  manu- 
facturing corporation,  such  as  might,  like  a  partnership  or  an  in- 
dividual engaged  in  manufactures,  sell  or  lease  all  its  property  to 
another  corporation.  Ardesco  Oil  Co.  v.  North  American  Oil  Co., 
66  Penn.  St.  375 ;  Treadwell  v.  Salisbury  Manuf.  Co.,  7  Gray,  393. 
But  the  purpose  of  its  incorporation,  as  defined  in  its  charter,  and 
recognized  and  confirmed  by  the  legislature,  being  the  transpor- 
tation of  passengers,  the  plaintiff  exercised  a  public  employment, 
and  was  charged  with  the  duty  of  accommodating  the  public  in 
the  line  of  that  employment,  exactly  corresponding  to  the  duty 
which  a  railroad  corporation  or  a  steamboat  company,  as  a  carrier 
of  passengers,  owes  to  the  public,  independently  of  possessing  any 
right  of  eminent  domain.  The  public  nature  of  that  duty  was  not 
affected  by  the  fact  that  it  was  to  be  performed  by  means  of  cars 
constructed  and  of  patent  rights  owned  by  the  corporation,  and 
over  roads  owned  by  others.  The  plaintiff  was  not  a  strictly 
private,  but  a  quasi  public  corporation;  and  it  must  be  so  treated 
as  regards  the  validity  of  any  attempt  on  its  part  to  absolve  itself 
from  the  performance  of  those  duties  to  the  public,  the  perform- 
ance of  which  by  the  corporation  itself  was  the  remuneration  that 
it  was  required  by  law  to  make  to  the  public  in  return  for  the 
grant  of  its  franchise.  Pickard  v.  Pullman  Southern  Car  Co., 
117  U.  S.  34;  York  &  Maryland  Railroad  v.  Winans,  17  How. 
30,  39;  Railroad  Co.  v.  Lockwood,  17  Wall.  357;  Liverpool  & 
Great  Western  Steam  Co.  v.  Phenix  Ins.  Co.,  129  U.  S.  397, 

The  evident  purpose  of  the  legislature,  in  passing  the  statute  of 
1870,  was  to  enable  the  plaintiff  the  better  to  perform  its  duties 
to  the  public,  by  prolonging  its  existence,  doubling  its  capital,  and 
confirming,  if  not  enlarging,  its  powers.  An  intention  that  it 
should  immediately  abdicate  those  powers,  and  cease  to  perform 
those  duties,  is  so  inconsistent  with  that  purpose,  that  it  cannot 
be  implied,  without  much  clearer  expressions  of  the  legislative  will 
looking  towards  that  end,  than  are  to  be  found  in  this  statute. 

The  provision  of  this  statute,  by  which  the  plaintiff  is  empow- 
ered to  contract  with  other  corporations  "for  the  leasing  or  hir- 
ing and  transfer  to  them,  or  any  of  them,"  of  its  "railway  cars 
and  other  personal  property,"  is  fully  satisfied  by  construing  it  as 


CENTRAL  TRANSP.    CO   V.    PULLMAN's   PALACE   CAR   CO.  1 57 

confirming  the  plaintiff's  right  to  do  as  it  had  been  doing,  to 
"lease"  or  "hire"  (which  are  equivalent  words)  to  other  cor- 
porations in  the  regular  course  of  its  business,  and  to  "transfer" 
under  such  leasing  or  hiring,  its  "railway  cars,"  and  "other  per- 
sonal property,"  either  connected  with  the  cars,  or  at  least  of  the 
same  general  nature  of  tangible  property.  It  can  hardly  be 
stretched  to  warrant  the  plaintiff"  in  making  to  a  single  corpora- 
tion an  absolute  transfer,  or  a  long  lease,  of  all  that  might  be 
comprehended  in  the  words  "personal  property"  in  their  widest 
sense,  including  not  only  goods  and  chattels,  but  moneys,  credits 
and  rights  of  action.  In  any  view,  it  would  be  inconsistent  alike 
with  the  main  purpose  of  the  statute,  and  with  the  uniform  course 
of  decision  in  this  court,  to  construe  these  words  as  authorizing 
the  plaintiff  to  deprive  itself,  either  absolutely,  or  for  a  long 
period  of  time,  of  the  right  to  exercise  the  franchise  granted  to 
it  by  the  legislature  for  the  accommodation  of  the  public.     *     *     * 

Considering  the  long  term  of  the  indenture,  the  perishable  na- 
ture of  the  property  transferred,  the  large  sums  to  be  paid  quar- 
terly by  the  defendant  by  way  of  compensation,  its  assumption  of 
the  plaintiff's  debts,  and  the  frank  avowal,  in  the  indenture  itself, 
of  the  intention  of  the  two  corporations  to  prevent  competition 
and  to  create  a  monopoly,  there  can  be  no  doubt  that  the  chief 
consideration  for  the  sums  to  be  paid  by  the  defendant  was  the 
plaintiff's  covenant  not  to  engage  in  the  business  of  manufactur- 
ing, using  or  hiring  sleeping  cars ;  and  that  the  real  purpose  of 
the  transaction  was,  under  the  guise  of  a  lease  of  personal  prop- 
erty, to  transfer  to  the  defendant  nearly  the  whole  corporate  fran- 
chise of  the  plaintiff,  and  to  continue  the  plaintiff's  existence  for 
the  single  purpose  of  receiving  compensation  for  not  performing 
its  duties. 

The  necessary  conclusion  from  these  premises  is,  that  the  con- 
tract sued  on  was  unlawful  and  void,  because  it  was  beyond  the 
powers  conferred  upon  the  plaintiff  by  the  legislature,  and  because 
it  involved  an  abandonment  by  the  plaintiff  of  its  duty  to  the 
public.     *     *     * 

The  contract  sued  on  being  clearly  beyond  the  powers  of  the 
plaintiff  corporation,  it  is  unnecessary  to  determine  whether  it  is 
also  ultra  vires  of  the  defendant,  because,  in  order  to  bind  either 
party,  it  must  be  within  the  corporate  powers  of  both.  Thomas 
V.  Railroad  Co.,  Pennsylvania  Railroad  v.  St.  Louis  &c.  Railroad, 
and  Oregon  Railway  v.  Oregonian  Railway,  above  cited. 

It  was  argued  in  behalf  of  the  plaintiff  that,  even  if  the  contract 
sued  on  was  void,  because  ultra  vires  and  against  public  policy, 
yet  that,  having  been  fully  performed  on  the  part  of  the  plaintiff, 
and  the  benefits  of  it  received  by  the  defendant,  for  the  period 
covered  by  the  declaration,  the  defendant  was  estopped  to  set  up 
the  invalidity  of  the  contract  as  a  defense  to  this  action  to  re- 
cover the  compensation  agreed  on  for  that  period. 


158  THE  DOCTRINE  OF  ULTRA  VIRES  AND   ITS   APPLICATION. 

But  this  argument,  though  sustained  by  decisions  in  some  of  the 
states,  finds  no  support  in  the  judgments  of  this  court. 

(The  learned  judge  then  reviewed  the  Federal  decisions.) 

In  Pittsburgh  &c.  Railway  v.  Keokuk  &  Hamilton  Bridge,  it 
was  stated,  as  the  result  of  the  previous  cases  in  this  court,  that 
"a  contract  made  by  a  corporation,  which  is  unlawful  and  void 
because  beyond  the  scope  of  its  corporate  powers,  does  not,  by 
being  carried  into  execution,  become  lawful  and  valid,  but  the 
proper  remedy  of  the  party  aggrieved  is  by  disaffirming  the  con- 
tract and  suing  to  recover,  as  on  a  quantum  meruit,  the  value  of 
what  the  defendant  has  actually  received  the  benefit  of."  131 
U.  S.  371,  389. 

The  view  which  this  court  has  taken  of  the  question  presented 
by  this  branch  of  the  case,  and  the  only  view  which  appears  to 
us  consistent  with  legal  principles,  is  as  follows : 

A  contract  of  a  corporation,  which  is  ultra  vires,  in  the  proper 
sense,  that  is  to  say,  outside  the  object  of  its  creation  as  defined 
in  the  law  of  its  organization,  and  therefore  beyond  the  powers 
conferred  upon  it  by  the  legislature,  is  not  voidable  only,  but 
wholly  void,  and  of  no  legal  effect.  The  objection  to  the  contract 
is,  not  merely  that  the  corporation  ought  not  to  have  made  it, 
but  that  it  could  not  make  it.  The  contract  cannot  be  ratified  by 
either  party,  because  it  could  not  have  been  authorized  by  either. 
No  performance  on  either  side  can  give  the  unlawful  contract  any 
validity,  or  be  the  foundation  of  any  right  of  action  upon  it. 

When  a  corporation  is  acting  within  the  general  scope  of  the 
powers  conferred  upon  it  by  the  legislature,  the  corporation,  as 
well  as  persons  contracting  with  it,  may  be  estopped  to  deny  that 
it  has  complied  with  the  legal  formalities  which  are  prerequisites 
to  its  existence  or  to  its  action,  because  such  requisites  might  in 
fact  have  been  complied  with.  But  when  the  contract  is  beyond 
the  powers  conferred  upon  it  by  existing  laws,  neither  the  cor- 
poration, nor  the  other  party  to  the  contract,  can  be  estopped,  by 
assenting  to  it,  to  show  that  it  was  prohibited  by  those  laws. 

The  doctrine  of  the  common  law,  by  which  a  tenant  of  real 
estate  is  estopped  to  deny  his  landlord's  title,  has  never  been  con- 
sidered by  this  court  as  applicable  to  leases  by  railroad  corpora- 
tions of  their  roads  and  franchises.  It  certainly  has  no  bearing 
upon  the  question  whether  this  defendant  may  set  up  that  the 
lease  sued  on,  which  is  not  of  real  estate,  but  of  personal  property, 
and  which  includes,  as  inseparable  from  the  other  property  trans- 
ferred, the  inalienable  franchise  of  the  plaintiff,  is  unlawful  and 
void,  for  want  of  legal  capacity  in  the  plaintiff  to  make  it. 

A  contract  ultra  vires  being  unlawful  and  void,  not  because  it  is 
in  itself  immoral,  but  because  the  corporation,  by  the  law  of  its 
creation,  is  incapable  of  making  it,  the  courts,  while  refusing  to 
maintain  any  action  upon  the  unlawful  contract,  have  always 
striven  to  do  justice  between  the  parties,  so  far  as  could  be  done 
consistently    with    adherence    to    law,    by    permitting    property    or 


Pullman's  palace  car  co.  v.  centr^xl  transp.  co.         159 

money,  parted  with  on  the  faith  of  the  unlawful  contract,  to  be 
recovered  back,  or  compensation  to  be  made  for  it. 

In  such  case,  however,  the  action  is  not  maintained  upon  the 
unlawful  contract,  nor  according  to  its  terms;  but  on  an  implied 
contract  of  the  defendant  to  return,  or,  failing  to  do  that,  to  make 
compensation  for,  property  or  money  which  it  has  no  right  to 
retain.  To  maintain  such  an  action  is  not  to  affirm,  but  to  dis- 
affirm, the  unlawful  contract. 

The  ground  and  the  limits  of  the  rule  concerning  the  remedy, 
in  the  case  of  a  contract  ultra  vires,  which  has  been  partly  per- 
formed, and  under  which  property  has  passed,  can  hardly  be 
summed  up  better  than  they  were  by  Mr.  Justice  Miller  in  a  pas- 
sage already  quoted,  where  he  said  that  the  rule  "stands  upon  the 
broad  ground  that  the  contract  itself  is  void,  and  that  nothing 
which  has  been  done  under  it,  nor  the  action  of  the  court,  can 
infuse  any  vitality  into  it;"  and  that  "where  the  parties  have  so 
far  acted  under  such  a  contract  that  they  cannot  be  restored  to 
their  original  condition,  the  court  inquires  if  relief  can  be  given 
independently  of  the  contract,  or  whether  it  will  refuse  to  inter- 
fere as  the  matter  stands."  Pennsylvania  Railroad  v.  St.  Louis 
&c.  Railroad.  118  U.  S.  317. 

Whether  this  plaintiff  could  maintain  any  action  against  this 
defendant,  in  the  nature  of  a  quantum  meruit,  or  otherwise,  inde- 
pendently of  the  contract,  need  not  be  considered,  because  it  is 
not  presented  by  this  record,  and  has  not  been  argued.  This  ac- 
tion, according  to  the  declaration  and  the  evidence,  was  brought 
and  prosecuted  for  the  single  purpose  of  recovering  sums  which 
the  defendant  had  agreed  to  pay  by  the  unlawful  contract,  and 
which,  for  the  reasons  and  upon  the  authorities  above  stated,  the 
defendant  is  not  liable  for. 

Judgment  affirmed. 


PUT.LMAN'S  PALACE  CAR  CO.  v.  CENTRAL  TRANS- 
PORTATION  CO. 

1897.     171   U.  S.   138,  43  L.  ed.   108.  18  Sup.  Ct.  808.^ 

The  record  in  this  case  shows  that  in  1870  the  Central  Trans- 
portation Company,  hereafter  called  the  Central  Company,  was  a 
corporation  which  had  been  in  1862  incorporated  under  the  gen- 
eral manufacturing  laws  of  the  State  of  Pennsylvania.  It  was 
engaged  in  the  business  of  operating  railway  sleeping  cars  and  of 
hiring  them  to  railroad  companies  under  written  contracts  by 
which  the  cars  were  to  be  used  by  the  railroad  companies  for  the 
purpose  of  furnishing  sleeping  conveniences  to  travelers.  The 
corporation  at  this  time  had  contracts  with  a  number  of  different 

'  Statement  abridged.     Portions  of  opinion  omitted. — Ed. 


l6o  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION. 

railroad  companies  in  the  East,  principally,  but  not  exclusively, 
v^'ith  what  is  known  as  the  Pennsylvania  Railroad  system,  and  it 
had  been  engaged  in  its  business  with  those  companies  for  some 
time  prior  to  1870.  In  the  year  last  named  the  Pullman's  Palace 
Car  Company,  hereafter  called  the  Pullman  Company,  was  a  cor- 
poration which  had  been  incorporated  under  the  laws  of  the  State 
of  Illinois,  It  was  doing  the  same  general  kind  of  business  in  the 
West  that  the  Central  Company  was  doing  in  the  East.  For  rea- 
sons not  material  to  detail,  the  two  companies  entered  into  an 
agreement  of  lease,  which  was  executed  February  17,  1870. 

By  its  terms  the  Central  Company  leased  to  the  Pullman  Com- 
pany its  entire  plant  and  personal  property  together  with  its  con- 
tracts which  it  had  with  railroad  companies  for  the  use  of  its 
sleeping  cars  on  their  roads,  and  also  the  patents  belonging  to  it. 
The  lease  was  to  run  for  ninety-nine  years,  which  was  the  dura- 
tion of  the  charter  of  the  Central  Company. 

It  was  also  agreed  that  the  Central  Company  would  not  engage 
in  the  business  of  manufacturing,  using  or  hiring  sleeping  cars 
while  the  contract  remained  in  force. 

In  consideration  of  these  various  obligations,  the  Pullman  Com- 
pany agreed  to  pay  annually  the  sum  of  $264,000  during  the  entire 
term  of  ninety-nine  years,  in  quarterly  payments,  the  first  quar- 
ter's payment  to  be  made  on  the  first  of  April,  1870. 

From  the  time  of  the  execution  of  the  contract  its  terms  were 
carried  out,  and  no  particular  trouble  occurred  between  the  com- 
panies for  about  fifteen  years.  During  this  time  up  to  the  27th 
day  of  January,  1885,  the  Pullman  Company  paid  to  the  Central 
Company,  as  rent  under  the  contract,  the  sum  of  $3,960,000,  with- 
out any  computation  of  interest.  About  or  just  prior  to  January, 
1885,  difi'erences  arose  between  the  companies.  The  Pullman 
Company  claimed  the  right  to  terminate  the  contract  under  the 
eighth  clause  thereof,  or  else  to  pay  a  much  smaller  rent.  The 
merits  of  the  controversy  are  not  material. 

The  two  companies  not  agreeing,  and  the  Pullman  Company 
refusing  to  pay  the  rent  stipulated  for  in  the  lease,  the  Central 
Company  brought  successive  actions  to  recover  the  instalments  of 
rent  accruing.  In  one  of  them  the  Pullman  Company  pleaded  the 
illegality  of  the  lease,  as  being  ultra  vires  the  charter  of  the  Cen- 
tral Company.  The  plea  prevailed  in  the  trial  court,  and  upon 
writ  of  error  the  judgment  upholding  this  defense  was,  in  March, 
1891,  sustained  in  this  court.  Central  Transportation  Company 
V.  Pullman's  Car  Company,   139  U.   S.  24. 

The  present  suit  was  brought  by  the  Pullman  Company  to  en- 
join the  Central  Company  from  bringing  any  further  suits  for 
rent,  the  Pullman  Company  ofi^ering  to  return  such  of  the  demised 
property  as  was  still  in  existence  and  to  make  compensation  for 
the  balance  as  far  as  the  court  should  find  it  ought  to  do  so.  The 
Central  Company  answered  the  bill,  denying  many  of  its  material 
allegations,  including  the  allegation  that  the  lease  was  illegal.    Sub- 


Pullman's  palace  car  co.  v.  central  transp.  co.         i6i 

sequently  the  Central  Company  was  permitted  to  file  a  cross-bill, 
in  which  it  claimed  to  avail  itself  of  the  tenders  made  in  the  com- 
plainant's bill  with  respect  to  the  return  of  the  property  and  com- 
pensation, and  asked  for  an  accounting  of  all  profits ;  that  the 
Pullman  Company  should  be  adjudged  to  be  a  trustee  for  the 
Central  Company  of  all  contracts  of  transportation,  whether  orig- 
inal, new  or  renewals,  held  by  the  Pullman  Company  with  railway 
companies  with  which  there  were  contracts  of  transportation  with 
the  Central  Company  at  the  time  of  the  making  of  the  lease,  and 
that  defendant  should  in  the  future,  from  time  to  time,  account 
for  the  sums  which  should  be  due  by  reason  of  future  operations 
under  the  contracts. 

The  Pullman  Company  made  a  motion  for  leave  to  dismiss  its 
bill,  and  filed  demurrers  to  the  cross-bill.  Leave  to  dismiss  its 
bill  was  denied  and  the  demurrers  were  overruled  w'ith  leave  to 
present  the  questions  on  final  hearing. 

:\IR.  TUCTICE  PECKHAM,  after  stating  the  facts,  delivered 
the  opinion  of  the  court. 

The  facts  which  were  set  up  in  the  cross-bill  closely  afifected 
one  of  the  theories  upon  which  the  original  bill  was  filed,  viz..  the 
invalidity  of  the  lease.  They  were  relevant  to  the  matters  in  issue 
in  the  original  suit,  and  in  seeking  affirmative  relief  the  cross- 
complainant  is  but  amplifying  and  making  clearer  the  foundations 
for  the  intervention  of  equity  which  had  been  appealed  to  by  the 
Pullman  Company,  and  the  continued  intervention  of  which  would 
greatly  speed  a  final  termination  of  all  matters  for  litigation  be- 
tween the  parties.  The  court  below  did  not  err  in  permitting  the 
cross-bill  to  be  filed. 

This  brings  us  to  a  discussion  of  the  principles  upon  which  a 
recovery'  in  this  case  should  be  founded.  The  so  called  lease  men- 
tioned in  this  case  has  been  already  pronounced  illegal  and  void- 
by  this  court.  139  U.  S.  24.  The  contract  or  lease  was  held  to 
be  unlawful  and  void  because  it  was  beyond  the  powers  conferred 
upon  the  Central  Company  by  the  legislature,  and  because  it  in- 
volved an  abandonment  by  that  company  of  its  duty  to  the  public. 
It  was  added  that  there  was  strong  ground  also  for  holding  that 
the  contract  between  the  parties  was  void  because  in  unreasonable 
restraint  of  trade,  and  therefore  contrar>'  to  public  policy.  In 
making  the  lease  the  lessor  was  certainly  as  much  in  fault  as  the 
lessee.  It  was  argued  on  the  part  of  the  Central  Company  that 
even  if  the  contract  sued  on  were  void,  yet  that  having  been  fully 
performed  on  the  part  of  the  lessor  and  the  benefits  of  it  received 
by  the  lessee  for  the  period  covered  by  the  declaration  in  that 
case,  the  defendant  should  be  estopped  from  setting  up  the  in- 
validity of  the  contract  as  a  defense  to  the  action  to  recover  com- 
pensation for  that  period.  But  it  was  answered  that  this  argu- 
ment, though  sustained  by  the  decisions   in  some  of  the   States, 

11 — Private  Corp. 


l62  THE  DOCTRINE  OF  ULTRA  VIRES  AND   ITS  APPLICATION. 

finds  no  support  in  the  judgments  of  this  court,  and  cases  in  this 
court  were  cited  in  which  such  recoveries  were  denied. 

It  is  true  that  courts  in  different  States  have  allowed  a  recovery 
in  such  cases,  among  the  latest  of  which  is  the  case  of  Bath  Gas 
Light  Co.  V.  Claffy,  151  N.  Y.  24,  where  Chief  Judge  Andrews 
of  the  Court  of  Appeals  examines  the  various  cases,  and  that 
court  concurred  with  him  in  permitting  a  recovery  of  rent  upon 
a  void  lease  where  the  lessee  had  enjoyed  the  benefits  of  the  pos- 
session of  the  property  of  the  lessor  during  the  time  for  which 
the  recovery  of  rent  was  sought. 

But  in  the  case  of  this  lease,  now  before  the  court,  a  recovery 
of  the  rent  due  thereunder  was  denied  the  lessor,  although  the 
lessee  had  enjoyed  the  possession  of  the  property  in  accordance 
with  the  terms  of  the  lease.  It  was  said  (page  60  of  the  report 
in  139  U.  S.),  "the  courts,  while  refusing  to  maintain  any  action 
upon  the  unlawful  contract,  have  always  striven  to  do  justice 
between  the  parties  so  far  as  could  be  done  consistently  with  ad- 
herence to  law,  by  permitting  property  or  money  parted  with  on 
the  faith  of  the  unlawful  contract  to  be  recovered  back  or  com- 
pensation to  be  made  for  it.  In  such  case,  however,  the  action  is 
not  maintained  upon  the  unlawful  contract  nor  according  to  its 
terms,  but  on  an  implied  contract  of  the  defendant  to  return,  or 
failing  to  do  that,  to  make  compensation  for  the  property  or 
money  which  it  had  no  right  to  retain.  To  maintain  such  an 
action  was  not  to  affirm,  but  disaffirm,  the  unlawful  contract." 
And  the  opinion  of  the  court  ended  with  the  statement  that, 
"Whether  this  plaintifif  could  maintain  any  action  against  this 
defendant,  in  the  nature  of  a  quantum  meruit,  or  otherwise,  in- 
dependently of  the  contract,  need  not  be  considered,  because  it  is 
not  presented  by  this  record  and  has  not  been  argued.  This  action, 
according  to  the  declaration  and  evidence,  was  brought  and  prose- 
cuted for  the  single  purpose  of  recovering  sums  which  the  defend- 
ant had  agreed  to  pay  by  the  unlawful  contract,  and  which,  for 
the  reasons  and  upon  the  authorities  above  stated,  the  defendant 
was  not  liable  for." 

The  principle  is  not  new;  but,  on  the  contrary,  it  has  been  fre- 
quently announced,  commencing  in  cases  considerably  over  a  hun- 
dred years  old.  It  was  said  by  Lord  Mansfield,  in  Holman  v. 
Johnson,  i  Cowper,  341,  decided  in  1775,  that  "the  objection  that 
a  contract  is  immoral  or  illegal  as  between  the  plaintiff  and  de- 
fendant, sounds  at  all  times  very  ill  in  the  mouth  of  the  defend- 
ant. It  is  not  for  his  sake,  however,  that  the  objection  is  ever 
allowed;  but  it  is  founded  in  general  principles  of  policy,  which 
the  defendant  has  the  advantage  of,  contrary  to  the  real  justice, 
as  between  him  and  the  plaintiff,  by  accident,  if  I  may  so  say. 
The  principle  of  public  policy  is  this :  ex  dolo  malo  non  oritur 
actio.  No  court  will  lend  its  aid  to  a  man  who  founds  his  cause 
of  action  upon  an  immoral  or  an  illegal  act." 

The  cases  upholding  this  doctrine  are  numerous  and  emphatic. 


Pullman's  palace  car  co.  v.  central  transp.  co.        163 

Indeed,  there  is  really  no  dispute  concerning  it,  but  the  matter  of 
controversy  in  this  case  is  as  to  the  extent  to  which  the  doctrine 
should  be  applied  to  the  facts  herein.  Many  of  the  cases  are  re- 
ferred to  and  commented  upon  in  the  opinion  delivered  in  the 
case  in  139  U.  S.  24,  already  cited.  The  right  to  a  recovery  of 
the  property  transferred  under  an  illegal  contract  is  founded  upon 
the  implied  promise  to  return  or  make  compensation  for  it.  For 
illustrations  of  the  general  doctrine  as  applied  to  particular  facts 
we  refer  in  the  margin  to  a  few  of  the  multitude  of  cases  upon 
the  subject. 

They  are  substantially  unanimous  in  expressing  the  view  that  in 
no  way  and  through  no  channels,  directly  or  indirectly,  will  the 
courts  allow  an  action  to  be  maintained  for  the  recovery  of  prop- 
erty delivered  under  an  illegal  contract  where,  in  order  to  maintain 
such  recovery,  it  is  necessary  to  have  recourse  to  that  contract. 
The  right  of  recovery  must  rest  upon  a  disaffirmance  of  the  con- 
tract, and  it  is  permitted  only  because  of  the  desire  of  courts  to 
do  justice  as  far  as  possible  to  the  party  who  has  made  payment 
or  delivered  property  under  a  void  agreement,  and  which  in  justice 
he  ought  to  recover.  But  courts  will  not  in  such  endeavor  permit 
any  recovery  which  will  weaken  the  rule  founded  upon  the  prin- 
ciples of  public  policy  already  noticed. 

We  may  now  examine  the  record  herein  and  learn  the  grounds 
for  the  recovery  which  has  been  permitted,  and  determine  there- 
from whether  the  judgment  in  favor  of  the  Central  Company 
should  be  in  all  things  affirmed,  or  if  not,  then  how  far  the  lia- 
bility of  the  cross-defendant  extends,  and,  if  possible,  what  should 
be  the  amount  of  the  judgment  against  it. 

(The  learned  judge  was  of  the  opinion  that  the  court  below 
erred  in  the  manner  of  ascertaining  the  value  and  held  that  the 
Central  Company  was  entitled  to  recover  only  the  value  of  the 
property  transferred  under  the  lease,  with  interest,  and  was  not 
entitled  to  recover  the  value  of  contracts  with  railroad  companies 
or  patents,  all  of  which  had  expired,  or  anything  for  the  breaking 
up  of  its  business.) 

Nor  can  we  accede  to  the  view  that  the  Pullman  Company  is 
liable  for  the  earnings  of  the  property  which  it  realized  by  means 
of  putting  such  property  to  the  very  use  which  the  lease  provided. 
It  had  the  right  while  both  parties  acquiesced  to  so  use  the  prop- 
erty. 

There  is  no  question  of  trustee  in  the  case.  Root  v.  Railway 
Company,  105  U.  S.  189,  215. 

The  property  was  placed  in  its  hands  by  the  lessor  and  in  ac- 
cordance with  the  terms  of  the  agreement.  It  was  not  then  im- 
pressed with  any  trust  according  to  any  definition  of  that  term 
known  to  us.  Although  the  title  did  not  pass  and  was  not  in- 
tended to  pass,  the  lessee  did  nothing  with  the  property  other  than 
was  justified  by  the  lease.  His  liability  is  based  only  upon  an 
implied  promise  to  return  or  make  compensation  therefor.     This 


164  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION. 

implication  of  a  promise  would  not  arise  until  one  or  the  other 
party  chose  to  terminate  the  lease,  for  the  law  implies  such  prom- 
ise in  order  only  that  justice,  so  far  as  possible,  may  be  done.  So 
long  as  neither  party  takes  any  objection  to  the  agreement,  and 
both  carry  it  out,  there  is  no  room  for  any  differences,  and  no 
promise  to  return  the  property  or  make  compensation  is  necessary, 
and  none  is  therefore  implied.  The  use  of  the  property  is  lawful 
as  between  the  parties,  so  long  as  the  lease  was  not  repudiated 
by  either,  and  the  rent  compensates  for  the  use.  After  the  repu- 
diation the  promise  is  then  implied,  and  it  is  fulfilled  by  the 
payment  of  the  value  of  the  property  at  the  time  the  promise  is 
implied  and  interest  thereon  from  that  time. 

As  to  the  claim  of  the  lessor  that  its  business  has  been  broken 
up,  its  contracts  with  railroads  terminated  and  the  corporation  left 
in  a  condition  of  inability  to  again  take  up  its  former  plans,  and 
that  all  this  should  be  regarded  in  the  measure  of  the  relief  to 
which  it  should  be  entitled,  the  same  considerations  which  we 
have  already  adverted  to  must  be  entertained.  These  are  results 
of  the  illegality  of  the  contract  entered  into  between  these  parties, 
and  its  subsequent  repudiation  on  that  ground,  and  in  regard  to 
such  illegality  the  Central  Company  is  certainly  as  much  in  the 
wrong  as  the  cross-defendant  herein.  The  former  knew  the  ex- 
tent of  its  obligations  under  its  charter  as  well  as  the  latter 
did,  and  the  illegal  provisions  of  the  lease  were  quite  as  much  its 
doing  as  they  were  those  of  the  cross-defendant.  To  grant  relief 
based  upon  these  facts  would  be  so  clearly  to  grant  relief  to  one 
of  the  parties  to  an  illegal  contract,  based  upon  the  contract  itself 
or  upon  alleged  damages  arising  out  of  its  non-fulfilment,  that 
nothing  more  need  be  said  upon  that  branch  of  the  subject.  It  is 
emphatically  an  application  of  the  rule  that  in  such  a  case  the 
position  of  the  defendant  is  the  better.     *     *     * 

Although  the  Central  Company  may  have  been  injured  by  the 
result  of  this  lease,  yet  that  is  a  misfortune  which  has  overtaken 
it  by  reason  of  the  rule  of  law  which  declares  void  a  lease  of 
such  a  nature,  and  while  the  company  may  not  have  incurred  any 
moral  guilt  it  has  nevertheless  violated  the  law  by  making  an  il- 
legal contract  and  one  which  was  against  public  policy,  and  it  must 
take  such  consequences  as  result  therefrom. 

The  judgment  appealed  from  must  be  reversed  and  the  case 
remitted  to  the  Circuit  Court  for  the  Eastern  District  of  Pennsyl- 
vania, with  directions  to  enter  a  judgment  for  the  Central  Trans- 
portation Company  in  accordance  with  this  opinion. 

MR.  JUSTICE  HARLAN  dissented. 

MR.  JUSTICE  WHITE  dissented  on  the  ground  that  the  judg- 
ment appealed  from  was  for  the  correct  amount  and  should  not  be 
reduced.- 

"See,  also,  Appleton  v.  Citizens'  Central  Nat.  Bk.,  190  N.  Y.  417,  affd. 
216  U.  S.  196.— Ed. 


KERFOOT     V.     farmers'     &      MERCHANTS"     BANK.  I65 

KERFOOT  V.  FARMERS'  &  MERCHANTS'  BANK. 

1910.     218  U.  S.  281,  54  L.  ed.  104-2.^ 

The  facts,  which  involve  the  vaHdity  of  a  transfer  of  real  estate 
to  a  national  bank,  are  stated  in  the  opinion. 

MR.  JUSTICE  HUGHES  delivered  the  opinion  of  the  court. 

This  action  was  brought  in  1894,  in  the  Circuit  Court  of  Grundy 
County,  state  of  Alissouri,  to  set  aside  a  deed  of  real  property 
made  by  James  H.  Kerfoot  to  the  First  National  Bank  of  Tren- 
ton, Missouri,  and  also  a  deed  by  which  that  bank  purported  to 
convey  the  same  property  to  the  defendants,  Hervey  Kerfoot, 
Ahvilda  Kerfoot  and  Lester  R.  Kerfoot,  and  for  the  recovery  of 
possession.  The  plaintiffs  in  the  action,  which  was  brought  shortly 
after  the  death  of  James  H.  Kerfoot,  were  Homar  Hall,  admin- 
istrator of  his  estate,  and  Robert  Earl  Kerfoot,  his  infant  grand- 
son, who  claimed  to  be  his  only  heir  at  law  and  sued  by  Homer 
Hall  as  next  friend.  The  petition  contained  two  counts,  one  in 
equity,  the  other  in  ejectment.  Upon  the  trial  the  Circuit  Court 
found  the  issues  for  defendants  and  the  judgment  in  their  favor 
w'as  affirmed  by  the  Supreme  Court  of  IMissouri.  145  Missouri, 
418.  On  his  coming  of  age  Robert  Earl  Kerfoot  sued  out  this 
writ  of  error. 

The  plaintiff  in  error  challenges  the  conveyance  made  by  James 
H.  Kerfoot  to  the  bank,  upon  the  ground  that  under  §  5137  of 
the  Revised  Statutes  of  the  United  States,  relating  to  national 
banks,  the  bank  was  without  power  to  take  the  property,  and 
hence  that  no  title  passed  by  the  deed,  but  that  it  remained  in 
the  grantor  and  descended  to  the  plaintiff"  in  error  as  his  heir  at 
law.  It  appears  that  the  deed,  which  was  absolute  in  form,  with 
warranty  and  expressing  a  substantial  consideration,  was  executed 
in  pursuance  of  an  arrangement  by  which  the  title  to  the  property 
was  to  be  held  in  trust  to  be  conveyed  upon  the  direction  of  the 
grantor;  and  the  Supreme  Court  of  IMissouri  decided  that  a  trust 
was  in  fact  declared  by  the  grantor  in  favor  of  Hervey,  Ahvilda 
and  Lester  R.  Kerfoot,  to  whom  ran  a  quitclaim  deed,  which  he 
prepared  and  forwarded  to  the  bank  to  be  signed  and  acknowl- 
edged by  it  and  then  returned  to  him. 

But  while  the  purpose  of  this  transaction  was  not  one  of  those 
described  in  the  statute  for  which  a  national  bank  may  purchase 
and  hold  real  estate,  it  does  not  follow  that  the  deed  was  nullity 
and  that  it  failed  to  convey  title  to  the  property. 

In  the  absence  of  a  clear  expression  of  legislative  intention  to 
the  contrary,  a  conveyance  of  real  estate  to  a  corporation  for  a 

*See.  also,  Barnes  v.  Suddard  (1886),  117  111.  237,  7  N.  E.  477;  Rector 

V.  Hartford  Deposit  Co.  (1901),  190  III.  380,  60  N.  E.  .=^28  (distinguishing 

total  want,  from  abuse,  of  powers);  Hayden  v,  Hayden  (1909),  241   111. 
183,  89  N.  E.  347.— Ed. 


l66  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION. 

purpose  not  authorized  by  its  charter,  is  not  void,  but  voidable, 
and  the  sovereign  alone  can  object.  Neither  the  grantor  nor  his 
heirs  nor  third  persons  can  impugn  it  upon  the  ground  that  the 
grantee  has  exceeded  its  powers.  Smith  v.  Sheeley,  12  Wall.  358; 
National  Bank  v.  Matthews,  98  U.  S.  621 ;  National  Bank  v. 
Whitney,  103  U.  S.  99;  Reynolds  v.  Crawfordsville  Bank,  112  U. 
S.  405;  Fritts  V.  Palmer,  132  U.  S.  282;  Leazure  v.  Hillegas,  7 
Serg.  &  R.  (Pa.)  313.  Thus,  although  the  statute  by  clear  im- 
plication forbids  a  national  bank  from  making  a  loan  upon  real 
estate,  the  security  is  not  void  and  it  cannot  be  successfully  as- 
sailed by  the  debtor  or  by  subsequent  mortgagees  because  the 
bank  was  without  authority  to  take  it;  and  the  disregard  of  the 
provisions  of  the  act  of  Congress  upon  that  subject  only  lays  the 
bank  open  to  proceedings  by  the  Government  for  exercising  pow- 
ers not  conferred  by  law.  National  Bank  v.  Matthews,  supra; 
National  Bank  v.  Whitney,  supra;  Swope  v.  Leffingwell,   105  U. 

s.  3. 

In  National  Bank  v.  Matthews,  supra,  viewing  that  case  in  this 
aspect,  the  court  said: 

"The  opinion  of  the  Supreme  Court  of  Missouri  assumes  that 
the  loan  was  made  upon  real-estate  security  within  the  meaning 
of  the  statute,  and  their  judgment  is  founded  upon  that  view. 
These  things  render  it  proper  to  consider  the  case  in  that  aspect. 
But,  conceding  them  to  be  as  claimed,  the  consequence  insisted 
upon  by  no  means  necessarily  follows.  The  statute  does  not  de- 
clare such  a  security  void.  It  is  silent  upon  the  subject.  If  Con- 
gress so  meant,  it  would  have  been  easy  to  say  so;  and  it  is 
hardly  to  be  believed  that  this  would  not  have  been  done,  instead 
of  leaving  the  question  to  be  settled  by  the  uncertain  result  of 
litigation  and  judicial  decision.  Where  usurious  interest  is  con- 
tracted for,  a  forfeiture  is  prescribed  and  explicitly  defined. 

"Where  a  corporation  is  incompetent  by  its  charter  to  take  a 
title  to  real  estate,  a  conveyance  to  it  is  not  void,  but  only  void- 
able, and  the  sovereign  alone  can  object.  It  is  valid  until  assailed 
in  a  direct  proceeding  instituted  for  that  purpose.  Leazure  v. 
Hillegas,  7  Serg.  &  R.  (Pa.)  313;  Goundie  v.  Northampton  Water 
Co.,  7  Pa.  St.  233;  Runyon  v.  Coster,  14  Pet.  122;  The  Banks  v. 
Poitiaux,  3  Rand.  (Va.)  136;  Mclndoe  v.  The  City  of  St.  Louis, 
10  Missouri  575,  S77-  See  also  Gold  Mining  Co.  v.  National 
Bank,  96  U.  S.  646." 

This  rule,  while  recognizing  the  authority  of  the  Government  to 
which  the  corporation  is  amenable,  has  the  salutary  effect  of  as- 
suring the  security  of  titles  and  of  avoiding  the  injurious  conse- 
quences which  would  otherwise  result.  In  the  present  case  a  trust 
was  declared  and  this  trust  should  not  be  permitted  to  fail  and  the 
property  to  be  diverted  from  those  for  whom  it  was  intended,  by 
treating  the  conveyance  to  the  bank  as  nullity,  in  the  absence  of 
a  clear  statement  of  legislative  intent  that  it  should  be  so  regarded. 


HUBBARD    V.    WORCESTER    ART    MUSEUM.  167 

The  cases  in  this  court,  which  are  rehed  upon  by  the  plaintiff 
in  error,  are  not  applicable  to  the  facts  here  presented  and  are  in 
no  way  inconsistent  with  the  doctrine  to  which  we  have  referred. 
]\IcCormick  v.  Alarket  Bank,  165  U.  S.  538;  California  Bank  v. 
Kennedy,  167  U.  S.  362;  Concord  First  National  Bank  v.  Haw- 
kins, 174  U.  S.  364. 

It  was  also  urged  by  the  plaintiff  in  error  that  the  deed  was  not 
accepted  by  the  bank,  and  was  inoperative  for  that  reason.  The 
Supreme  Court  of  Missouri  held  upon  the  evidence  that  it  was 
accepted,  and  this  court,  on  a  question  of  that  character,  does  not 
review  the  findings  of  fact  which  have  been  made  in  the  state 
court.  Waters-Pierce  Oil  Co.  v.  State  of  Texas,  212  U.  S.  86; 
Egan  V.  Hart,  165  U.  S.  188;  Clipper  Mining  Co.  v.  Eli  Mining 
&  Land  Co.,  194  U.  S.  220. 

Assuming  that  the  deed  was  accepted  by  the  bank,  it  was  effec- 
tive to  pass  the  legal  title,  and  the  plaintiff'  in  error  as  heir  at 
law  of  the  grantor  cannot  question  it. 

Judgment  affirmed. 


HUBBARD  v.  WORCESTER  ART  IMUSEUM. 

1907.     194  Alass.  280,  80  N.  E.  490. 

Acquisition  of  Property  by  Devise  or  Bequest. 

KNOWLTOX.  C.  J.— This  is  a  petition  brought  by  the  heirs 
of  Stephen  Salisbury,  late  of  Worcester,  deceased,  for  leave  to 
file  an  information  in  the  nature  of  a  quo  warranto  against  the 
respondent,  under  the  R.  L.  c.  192,  §§  6-13.  The  Worcester  Art 
]\Iuseum  is  a  corporation  established  under  the  provisions  of  the 
Pub.  Sts.  c.  115  (R.  L.  c.  125),  "for  the  purpose,"  as  set  forth 
in  its  certificate  of  incorporation,  "of  founding  an  institution  for 
the  promotion  of  art  and  art  education  in  said  Worcester ;  erect- 
ing and  maintaining  buildings  for  the  preservation  and  exhibition 
of  works  and  objects  of  art;  making  and  exhibiting  collections  of 
such  works,  and  providing  instruction  in  the  industrial,  liberal, 
and  fine  arts ;  for  holding  real  and  personal  estate  in  the  further- 
ance of  this  purpose ;  and  for  the  holding  and  administering 
funds  acquired  by  the  corporation  for  these  and  kindred  objects 
in  accordance  with  the  will  of  the  donors.  All  of  said  property 
and  funds  of  the  corporation,  however,  are  to  be  held  solely  in 
trust  for  the  benefit  of  all  the  people  of  the  city  of  Worcester." 
By  the  will  of  I\Ir.  Salisbury  this  corporation  is  made  his  residu- 
ary legatee,  and  if  the  intention  of  the  testator  is  carried  out.  it 
will  receive,  under  the  will,  real  and  personal  estate  amounting 
in  value  to  between  $2,000,000  and  S3.500.ooo.  By  the  R.  L.  c. 
125,  §  8,  such  corporations  are  authorized  to  "hold  real  and  per- 
sonal estate  to  an  amount  not  exceeding  one  million  five  hundred 


1 68  THE  DOCTRINE  OF  ULTEA  VIRES  AND  ITS  APPLICATION. 

thousand  dollars."  By  the  St.  1906,  c.  312,  enacted  after  the 
probate  of  the  will,  the  right  of  this  respondent  to  hold  real  and 
personal  estate  was  enlarged  to  an  amount  not  exceeding  $5,000,- 
000.  The  petitioners  contend  that,  by  reason  of  the  limitation  in 
the  statute,  the  gift  was  void;  that,  as  heirs  at  law  of  the  testator, 
their  rights  in  this  part  of  his  estate  became  vested  on  the  pro- 
bate of  the  will ;  that  the  St,  1906  is  prospective  in  its  operation, 
and  does  not  affect  the  right  of  the  respondent  to  hold  property 
under  this  will,  and  that,  if  it  were  construed  as  applying  to  prop- 
erty devised  by  this  will,  it  would  be  unconstitutional  and  void. 

The  statute  under  which  the  petition  is  brought  has  been  con- 
sidered in  Goddard  v.  Smithett,  3  Gray  116,  in  Hartnett  v. 
Plumbers'  Supply  Association,  169  Mass.  229,  and  in  other  cases. 
We  will  assume  in  favor  of  the  petitioners,  without  deciding,  that 
if  they  were  right  in  their  view  of  the  questions  of  substantive 
law  involved,  it  would  be  available  to  give  them  the  remedy  which 
they  seek.  We  come  directly  to  the  effect  of  the  residuary  clause 
in  the  will. 

The  attack  upon  its  validity  may  be  considered  from  two 
points  of  view :  first,  in  reference  to  the  rights  of  testators,  as 
against  their  heirs,  to  dispose  of  their  property  for  charitable  or 
other  purposes;  secondly,  in  reference  to  the  provisions  of  the 
law  giving  this  kind  of  corporations  a  right  to  hold  property  to 
an  amount  not  exceeding  a  certain  sum. 

From  the  first  point  of  view  this  gift  is  perfect  and  complete. 
Except  for  the  protection  of  the  statutory  rights  of  a  husband  or 
wife,  the  power  of  a  testator  in  this  commonwealth  to  dispose  of 
his  estate  by  will  is  unlimited.  There  is  nothing  in  our  law  to 
restrain  one  from  giving  free  course  to  his  charitable  inclinations, 
up  to  the  last  moment  of  his  possession  of  a  sound,  disposing 
mind.  Making  charitable  gifts  in  this  commonwealth  is  not 
against  public  policy,  and  we  have  no  legislation,  such  as  has 
long  existed  in  England  and  in  New  York  and  some  of  the  other 
American  states,  putting  obstacles  in  the  way  of  testamentary  acts. 
The  only  ground  of  objection  to  this  part  of  the  will  is  not  from 
the  point  of  view  of  the  testator  or  of  his  heirs,  but  on  account 
of  the  provisions  of  the  statute  regulating  the  rights  of  corpora- 
tions as  to  the  holding  of  property.  We  must,  therefore,  deter- 
mine the  meaning  and  effect  of  this  statute  on  which  the  peti- 
tioners rely. 

They  contend  that  it  is  by  implication  an  absolute  prohibition 
against  the  holding,  at  any  time,  in  any  form,  for  any  purpose, 
of  a  greater  amount  of  property  than  that  stated,  and  that  any 
attempt  of  a  corporation  to  hold  more,  or  of  any  person  to  put 
more  into  the  ownership  of  a  corporation,  is  illegal  and  absolutely 
void.  The  respondent  contends  that  this  implied  limitation  of  the 
right  to  hold  is  made  on  grounds  of  public  policy;  that  it  is  a 
provision  only  in  favor  of  the  state,  which  the  state  may  enforce 
or  not,   as  it  chooses;   that  grants   or   devises   in   excess   of   the 


HUBBARD    V.    WORCESTER    ART    MUSEUM.  169 

amounts  stated  are  not  void,  but  only  voidable ;  that  third  persons 
cannot  question  the  validity  of  such  grants  or  devises,  but  that 
they  are  legal  so  long  as  the  state  leaves  them  undisturbed,  and 
that  the  state  may  at  any  time,  by  a  legislative  act  or  in  some 
other  proper  way,  completely  waive  its  right  of  enforcement.  _ 

In  interpreting  the  act  the  history  of  earlier  kindred  provisions 
may  be  helpful.  At  common  law,  corporations  were  authorized 
to  'acquire  and  hold  both  real  and  personal  property  without 
limit.  In  re  McGraw's  Estate,  iii  N.  Y.  66,  84.  "The  creation 
of  a  corporation  gives  to  it,  amongst  other  powers,  as  incident 
to  its  existence,  and  without  any  express  grant  of  such  powers, 
that  of  buying  and  selling."  Bank  v.  Poitiaux,  3  Rand.  136.  "A 
corporation  has,  from  its  nature,  a  right  to  purchase  lands,  though 
the  charter  contains  no  license  to  that  purpose."  Leazure  v.  Hil- 
legas,  7  S.  &  R.  313.  See  also  Page  v.  Heineberg,  40  Vt.  81; 
Mallett  V.  Simpson,  94  N.  C.  37,  41. 

Under  the  feudal  system,  when  land  was  given  to  a  corpora- 
tion, the  chief  lords  of  whom  the  land  was  held,  and  the  king  as 
ultimate  chief  lord,  lost  their  chances  of  escheat,  and  various 
other  rights  and  incidents  of  military  tenure.  During  the  middle 
ages,  the  accumulation  of  land  in  the  ecclesiastical  corporations 
was  so  great  as  to  be  thought  a  national  grievance.  Hence  the 
English  mortmain  acts,  which  go  back  for  their  origin  to  ]\Iagna 
Charta.  St.  9  Hen.  Ill,  c.  36,  and  which  have  continued  with 
various  modifications  to  this  day.  See  7  Edw.  I,  c.  2;  15  Rich. 
II,  c.  5;  Shelford  on  Alortmain,  2,  6,  8,  16,  25,  34,  39,  809,  812; 
Tyssen  on  Charitable  Bequests,  2,  383.  Under  these  acts  the 
alienations  were  not  void,  so  as  to  let  in  the  grantors  and  their 
heirs ;  but  they  merely  operated  as  a  forfeiture,  which  gave  a  right 
to  the  mesne  lord  and  the  king  to  enter  after  due  inquest.  This 
right  to  enter  was  often  waived  by  a  license  in  mortmain.  See 
citations  above,  and  Tyssen  on  Charitable  Bequests,  383 ;  St.  7 
&  8  Will.  Ill,  c.  37.  In  form  these  licenses  commonly  authorized 
a  holding  of  property  "not  exceeding"  a  certain  value.  In  later 
years  this  authority  sometimes  has  been  inserted  in  the  charter, 
and  this  limited  power  of  purchase  has,  it  is  said,  been  exceeded 
by  almost  all  corporations.  Shelford  on  Mortmain.  55.  See  also 
pages   10,  44,  49,  56,  891 ;  Tyssen  on   Charitable   Bequests,   393, 

394»  396. 

Another  act,  St.  9  Geo.  II.  c.  36,  which  is  usually  called  "The 
Mortmain  Act,"  but  is  called  by  Tyssen  the  "Georgian  Mortmain 
Act,"  is  of  a  very  different  nature.  One  of  its  purposes,  as  de- 
clared in  the  preamble,  is  to  avoid  "improvident  alienations  or 
disposition  made  by  languishing  or  dying  persons,  or  by  other 
persons,  to  uses  called  charitable  uses,  to  take  place  after  their 
deaths,  to  the  disherison  of  their  lawful  heirs."  Considered  in 
reference  to  its  purposes,  it  is  not  properly  called  a  mortmain 
act.  It  applies  only  to  gifts  for  charitable  uses :  and  under  it  all 
such  gifts,  unless  made  as  the  statute  allows,  are  absolutely  void. 


170  THE  DOCTRINE  OF  ULTRA  VIRES  AND  ITS  APPLICATION. 

We  never  have  had  any  real  mortmain  acts  in  Massachusetts. 
The  nearest  approach  to  one  was  the  Prov.  St.  1754-55,  c.  12;  3 
Prov.  Laws  (State  ed.),  778.  This  made  deacons  a  corporation 
to  take  gifts  for  charitable  purposes,  limited  the  grants  to  such 
as  would  produce  an  income  not  exceeding  three  hundred  pounds 
a  year,  and  provided  that  they  should  be  made  by  deed,  three 
months  before  death,  and  that  all  bequests,  devises,  or  later  grants 
should  be  void.  This  statute  related  only  to  gifts  to  deacons,  and 
was  repealed  by  St.  1785,  c.  51  (February  20,  1786),  which  re- 
enacted  a  part  of  the  law,  but  omitted  the  provision  that  gifts 
not  authorized  by  the  act  should  be  void.  Bartlet  v.  King,  12 
Mass.  537,  545.     See  R.  L.  c.  37,  §   i. 

The  significance  of  this  reference  to  English  law  and  to  our 
legislation  is,  first,  that,  except  for  this  short  period,  we  have 
never  had  in  Massachusetts  any  legislation  prohibiting  charitable 
gifts  to  trustees  or  corporations,  or  providing  that  any  kind  of 
conveyances,  devises,  or  bequests  to  corporations  shall  be  void. 
On  the  other  hand,  the  policy  of  the  commonwealth,  as  expressed 
both  by  legislation  and  the  decisions  of  its  courts,  has  been  ex- 
ceedingly liberal  to  testators  and  public  charities.  Sanderson  v. 
White,  18  Pick.  328,  333,  334;  American  Academy  v.  Harvard 
College,  12  Gray,  582,  595,  596;  Saltonstall  v.  Sanders,  11  Allen, 
446;  Jackson  v.  Phillips,  14  Allen,  539,  550.  Secondly,  the  im- 
plied limitations  upon  the  power  of  corporations  to  hold  property, 
which  appear  in  numerous  enactments,  have  been  made,  not  in 
the  interest  of  grantors  or  devisors  or  their  heirs,  but  in  the  in- 
terest of  the  state,  on  considerations  of  public  policy.  The  gen- 
eral form  of  these  limitations,  which  appears  in  the  statute  before 
us,  and  with  slight  variations  in  special  charters  (a  list  of  which, 
two  hundred  and  seventy-four  in  number,  granted  in  this  state 
before  1850,  has  been  furnished  us  through  the  industry  of  coun- 
sel) corresponds  with  the  form  of  licenses  granted  by  the  Crown 
in  England  under  the  old  mortmain  acts,  and  sometimes  embodied 
in  charters  granted  by  parliament.  Under  these  English  acts, 
grants  or  devises  to  a  corporation  to  hold  property  without  a 
license,  or  in  excess  of  the  amount  licensed,  were  not  void,  but 
only  voidable  by  the  mesne  lord  or  the  king,  upon  entry,  after 
inquest  according  to  law.  In  view  of  the  close  relations  between 
Massachusetts  and  the  mother  country  in  early  times,  this  justifies 
an  argument,  of  considerable  strength,  that  the  implied  limitations 
in  our  statutes  were  intended  to  have  no  greater  force  than  the 
old  mortmain  acts  of  England,  as  distinguished  from  the  Georgian 
mortmain  act. 

We  start  with  the  inherent  right,  already  referred  to,  of  every 
corporation  to  take  and  hold  property  at  common  law,  by  virtue 
of  the  act  of  its  creation.  This  right  is  recognized  in  our  statutes 
by  implication,  without  express  mention.  R.  L.  c.  109,  §§  4-6. 
What  force  is  to  be  given  to  the  words,  "may  hold  real  and 
personal  estate  to  an  amount  not  exceeding  one  million  five  hun- 


HUBBARD    V.    WORCESTER    ART    MUSEUM.  I7I 

dred  thousand  dollars"?  The  respondent  contends  that  their 
meaning  is  as  if  words  were  added  as  follows :  "and  beyond  that 
amount  it  shall  have  no  right  as  against  the  commonwealth ;  and 
the  commonwealth  may  take  proper  measures,  through  action  of 
the  attorney-general  or  otherwise,  to  prevent  or  terminate  such 
larger  holding."  According  to  the  argument,  a  taking  and  holding 
by  a  corporation,  above  the  prescribed  amount,  is  under  its  in- 
herent right.  As  between  it  and  the  state  as  the  guardian  of  the 
public  interest,  a  provision  as  to  amount  is  made,  which  does  not 
affect  its  right  as  to  third  persons.  As  to  the  general  legality  of 
the  holding,  except  when  the  state  chooses  to  enforce  the  law  for 
its  own  benefit,  the  condition  is  similar  to  that  resulting  from  a 
statutory  provision  which  is  merely  directory.  It  is  not  very  un- 
like the  old  law  as  to  conveyances  to  aliens.  Such  conveyances, 
whether  by  grant  or  devise,  were  good  against  every  one  but  the 
state,  and  could  be  set  aside  only  after  office  found.  Fox  v. 
Southack,  12  Mass.  143;  Waugh  v.  Riley,  8  Met.  290;  Judd  v. 
Lawrence,  i  Cush.  531;  Kershaw  v.  Kelsey,   100  Mass.  561. 

That  this  is  the  effect  of  such  limitations  in  statutes  of  this 
kind  where  the  title  of  the  corporation  is  under  a  grant,  as 
distinguished  from  a  devise,  seems  to  be  the  universal  rule.  *  *  * 

The  counsel  for  one  of  the  petitioners  says  in  his  brief:  "It 
is  fully  conceded  at  the  outset  that  where  a  corporation  takes  and 
holds  property  by  conveyance,  or  by  executed  gift  inter  vivos,  con- 
trary to  its  charter  rights,  no  one  but  the  state  can  complain. 
This  is  settled  by  a  practically  unbroken  line  of  decisions  in  all 
the  states,"  etc. 

But  if  the  statute  were  a  prohibition  that  renders  the  holding 
utterly  void,  and  the  taking  also  void,  as  is  argued  in  the  opinion 
in  In  re  McGraw's  Estate,  11 1  N.  Y.  66,  anybody  interested  could 
take  advantage  of  the  violation  of  law,  unless  he  was  precluded 
by  estoppel.  Most  of  the  cases  which  we  have  cited  do  not  put 
their  decision  on  the  ground  of  estoppel.  Often  the  question 
might  arise  when  there  was  no  estoppel.  The  ground  on  which 
most  of  the  cases  go  is  that  the  implication  is  not  an  absolute 
prohibition,  but  only  a  condition  affecting  the  rights  of  the  cor- 
poration as  between  it  and  the  state.  If  the  holding  were  an  il- 
legality which  was  utterly  void,  the  condition  would  be  the  same 
whether  the  taking  was  by  grant  or  devise,  and  a  variety  of  un- 
fortunate consequences  might  follow.  The  property  might  greatly 
increase  in  value  after  its  acquisition,  as  was  the  case  in  Evan- 
gelical Baptist  Society  v.  Boston,  192  Mass.  412.  In  that  case, 
although  the  property  of  the  corporation  largely  exceeded  in  value 
the  amount  authorized  by  the  statute,  there  was  no  intimation 
that  the  holding  was  illegal,  so  long  as  the  state  did  not  interfere. 
See  also  Humbert  v.  Trinity  Church.  24  Wend.  587,  605.  As  to 
all  interests  of  private  persons,  in  the  absence  of  interference  by 
the  state,  the  cases  generally  treat  titles  to  property  held  by  cor- 
porations in  excess  of  the  specially  authorized  amounts  as  good. 


172  THE  DOCTRINE  OF  ULTRA  VIRES  AND   ITS  APPLICATION. 

They  allow  the  corporations  to  give  good  titles  to  purchasers  of 
such  property. 

Some  judges,  in  holding  that  such  titles  cannot  be  taken  under 
wills,  endeavor  to  found  a  distinction  upon  the  executed  character 
of  a  title  by  grant,  and  suggests  that  a  devise  or  bequest  is  ex- 
ecutory. It  seems  to  us  that  there  is  no  good  reason  for  the 
distinction.  When  a  will  is  proved  and  allowed,  it  takes  effect 
immediately  to  pass  all  property  affected  by  it.  The  provision  in 
the  law  against  large  holdings  by  corporations  has  no  relation  to 
the  probate  of  the  will.  The  act  of  the  testator  in  executing  the 
will  is  confirmed  and  given  effect  as  a  complete  and  executed 
disposition  of  the  property,  by  the  allowance  of  the  will.  In  this 
respect  a  recorded  will  does  not  materially  differ  from  a  delivered 
deed.    The  heirs  at  law  are  bound  by  one  as  well  as  by  the  other. 

The  decisions  upon  the  precise  point  at  issue  are  conflicting. 
In  Jones  v.  Habersham,  107  U.  S.  174,  a  case  similar  to  that 
now  before  us,  it  was  held  by  the  court,  in  an  opinion  by  Mr. 
Justice  Gray,  that  "restrictions  imposed  by  the  charter  of  a  cor- 
poration upon  the  amount  of  property  that  it  may  hold,  cannot 
be  taken  advantage  of  collaterally  by  private  persons."  In  the 
same  case  in  the  circuit  court  the  question  had  been  considered 
previously,  and  the  same  result  was  reached,  in  an  opinion  by  Mr. 
Justice  Bradley  of  the  Supreme  Court  of  the  United  States,  which 
is  found  in  3  Woods  443,  475.  The  same  rule  is  established  in 
Maryland.  Hanson  v.  Little  Sisters  of  the  Poor,  79  Md.  434; 
In  re  Stickney's  Will,  85  Md.  79,  104.  DeCamp  v.  Dobbins,  2 
Stew.  (N.  J.)  36,  40,  was  decided  by  the  chancellor  on  this 
ground.  The  decree  was  affirmed  on  another  ground  in  the  Court 
of  Errors  and  Appeals,  4  Stew.  (N.  J.)  671,  690,  in  an  opinion 
by  Beasley,  C.  J.,  which  contains  a  dictum  disapproving  of  the 
view  of  the  chancellor.  In  Farrington  v.  Putnam,  90  Maine_  405, 
the  court,  in  a  very  elaborate  opinion,  in  a  case  identical  in  its 
leading  features  with  that  now  before  us,  held  that  the  gift  was 
good.  The  same  doctrine  is  stated  in  Brigham  v.  Peter  Bent 
Brigham  Hospital,  126  Fed.  Rep.  796,  801  ;  s.  c,  134  Fed.  Rep. 
513,  527.  It  is  also  stated  in  text  books.  Beach,  Corp.  (Purdy's 
ed.),   §  825;  Thompson,   Corp.,   §§  5795,   5797.^ 

The"  leading  case  which  presents  the  opposite  view  is  In  re 
McGraw's  Estate,  11 1  N.  Y.  66.  Although  the  decision  neces- 
sarily puts  a  construction  upon  a  statute  of  that  state,  this  con- 
struction seems  to  be  materially  affected  by  the  policy  of  New 
York  in  reference  to  charities.  Said  Judge  Peckham,  who  deliv- 
ered the  opinion:  "We  have  a  decided  mortmain  policy.  It  is 
found  in  our  statute  in  relation  to  wills,  prohibiting  a  devise  to 
a  corporation  unless  specially  permitted  by  its  charter  or  by  some 
statute  to  take  property  by  devise."  In  Chamberlain  v.  Cham- 
berlain, 43  N.  Y.  424,  the  court  refers  to  the  prohibition  of  de- 
vices, and  to  the  N.  Y.  St.  i860,  c.  360,  still  in  force,  which 
makes  void  all  bequests  or  devises  to  charity  in  excess  of  one- 


HUBBARD    V.    WORCESTER    ART    MUSEUM.  1 73 

half  the.  testator's  property,  where  he  leaves  relatives.  Other 
statutes  have  been  passed,  limiting  the  amount  that  can  be  de- 
vised to  certain  corporations  by  one  testator,  forbidding  a  devise 
or  bequest  to  charities,  by  a  person  leaving  relatives,  of  more  than 
one-fourth  of  his  estate,  and  making  void  such  gifts  where  the 
will  was  executed  within  two  months  before  the  death  of  the 
testator.  Gen.  Laws  of  N.  Y.  1901  (Heyd.  ed.),  4885,  4891, 
4892.  The  policy  of  that  state  in  regard  to  charities  has  been 
very  unfavorable.  See  Allen  v.  Stevens,  iBi  N.  Y.  122,  139,  140; 
People  V.  Powers,  147  N.  Y.  104;  Fosdick  v.  Hempstead,  125  N. 
Y.  581. 

The  doctrine  of  the  New  York  court  is  stated  as  the  law  in 
Davidson  College  v.  Chambers,  3  Jones  Eq.  253,  and  adopted  in 
Wood  v.  Hammond,  16  R.  I.  98,  115,  and  House  of  Mercy  v. 
Davidson,  90  Tex.  529.  In  the  case  in  North  Carolina  the  deci- 
sion was  by  two  of  the  three  judges  of  the  court,  the  chief  justice 
giving  an  able  dissenting  opinion.  The  courts  in  Kentucky 
and  Tennessee  have  expressed  approval  of  the  McGraw  case  in 
New  York,  but  in  terms  that  do  not  leave  the  grounds  of  their 
decisions  entirely  clear.  Cromie  v.  Louisville  Orphans'  Home 
Society,  3  Bush,  365,  383;  Heiskell  v.  Chickasaw  Lodge,  87  Tenn. 
668,  686.  In  reference  to  supposed  errors  in  the  opinion  in  the 
last  case,  see  Pritchard  on  Wills,  §  153,  note,  and  Farrington  v. 
Putnam,  90  Maine,  405,  433. 

In  the  construction  of  our  statute,  when  the  question  arises 
whether  a  different  rule  shall  be  established  in  regard  to  the  tak- 
ing and  holding  by  a  corporation  under  a  will  from  that  which 
is  universally  laid  down  in  regard  to  a  holding  under  a  deed,  we 
are  much  influenced  by  the  policy  of  our  law  as  to  devises  and 
bequests  for  charitable  purposes.  We  are  of  opinion  that,  under 
the  R.  L.  c.  125,  §  8,  a  gift  to  a  corporation  under  a  will,  to  an 
amount  in  excess  of  the  sum  specially  authorized,  should  be  held 
no  less  valid  than  a  similar  acquisition  of  title  under  a  deed.  It 
is  good  as  against  every  one  but  the  commonwealth.  It  follows 
that  the  St.  1906,  c.  312,  operated  as  a  waiver  of  the  common- 
wealth's right  to  terminate  the  holding,  and  a  legislative  declara- 
tion of  the  entire  validity  of  the  provision  in  the  will. 

If  we  are  wrong  in  this  conclusion,  the  petition  must  be  dis- 
missed on  an  independent  ground.  (The  judge  held  also  that 
the  gift  could  be  sustained  as  a  gift  to  a  public  charity.) 

Petition  dismissed.^ 

^Contra,  McGraw,  In  re  (Cornell  University  case),  111  New  York  66, 
19  N.  E.  233.— Ed. 


CHAPTER  VIII. 

LIABILITY    FOR    TORTS    AND    CRIMES. 

CHESTNUT  HILL  &c.  TURNPIKE  COMPANY  v.  RUTTER. 

Supreme  Court  of  Pennsylvania. 

1818.    4  Serg.  &  R.  6,  8  Am.  Dec.  675. 

Liability  of  a  Corporation  for  a  Tort. 

Action  of  trespass  for  stopping  a  water  course. 

TILGHMAN,  C.  J. :  *  *  *  But  it  is  objected  that  the  pres- 
ent action  is  not  on  contract,  but  on  tort,  and  a  very  refined 
argument  is  brought  forward,  to  prove  that  a  corporation  cannot 
be  guilty  of  a  tort.  A  corporation,  say  the  defendant's  counsel,  is 
a  mere  creature  of  law,  and  can  act  only  as  authorized  by  its 
charter.  But  the  charter  does  not  authorize  it  to  do  wrong,  and 
therefore  it  can  do  no  wrong.  The  argument  is  fallacious  in  its 
principles,  and  mischievous  in  its  consequences,  as  it  tends  to  in- 
troduce actual  wrongs  and  ideal  remedies ;  for  a  turnpike  com- 
pany may  do  great  injury,  by  means  of  laborers  who  have  no 
property  to  answer  the  damages  recovered  against  them.  It  is 
much  more  reasonable  to  say,  that  when  a  corporation  is  author- 
ized by  law  to  make  a  road,  if  any  injury  is  done  in  the  course 
of  making  that  road  by  the  persons  employed  under  its  authority, 
it  shall  be  responsible,  in  the  same  manner  that  an  individual  is 
responsible  for  the  actions  of  his  servants,  touching  his  business. 
The  act  of  the  agent  is  the  act  of  the  principal.  There  is  no  solid 
ground  for  a  distinction  between  contracts  and  torts.  Indeed,  with 
respect  to  torts,  the  opinion  of  the  courts  seem  to  have  been  more 
uniform  than  with  respect  to  contracts.  For  it  may  be  shown, 
that  from  the  earliest  times  to  the  present,  corporations  have  been 
held  liable  for  torts.  Many  cases  have  been  cited  from  the  Year 
Books.  Upon  examination,  they  do  not  all  answer  the  citations, 
but  enough  appears  to  show  that  the  law  was  so  understood. 
In  4  Hen.  7,  p.  13,  pi.  11,  we  find  an  action  of  trespass  against 
the  Mayor  and  Commonalty  of  York.  Plea,  that  all  the  inhabi- 
tants had  a  right  of  common  in  the  land  where  the  trespass  is 
supposed  to  have  been  committed:  held,  not  good,  because  the 
action  is  against  the  corporation,  and  the  plea  is  a  justification 
as  to  individuals.  In  a  subsequent  part  of  this  case,  it  is  said 
that  a  corporation  cannot  give  a  warrant  to  commit  a  trespass 
without  writing.  This,  if  it  be  law,  proves  that  a  warrant  may 
be  given  by  writing,  which  is  sufficient  for  the  plaintiff's  purpose, 

174 


GOODSPEED  V.   EAST   HADDAM    BANK.  175 

the  point  being,   whether   a   corporation   can   commit   a   trespass. 
In  8  Hen.  6,  p.  i,  pi.  n,  and  p.  14,  pi.  34,  trespass  was  brought 
against  the  Mayor  and  Bailiffs,  and  Commonalty  of  Ipswich,  and 
one  J.  Jabez.     It  was  objected,  that  a  corporation  and  an^  indi- 
vidual cannot  be  joined  in  one  action;  but  it  was  not  objected 
that  trespass  does  not  lie  against  a  corporation;  and  the  objec- 
tion is  said  to  have  been  overruled  in  14  Hen.  8,  2.     In  the  book 
of  Assizes  (31  Ass.  pi.  19),  it  appears  that  an  assize  of  novel  dis- 
seisin   was    maintained   against    the    Mayor    and    Commonalty    of 
Winton.     Brook  lays  it  down  that  if  the  mayor  and  commonalty 
disseise  one  who  releases  to  several  individuals  of  the  corporation, 
this  will  not  serve  the  Mayor  and  Commonalty,  because  the  dis- 
seisin is  in  their  corporate  capacity.     In  the  old  books  of  entries 
are  numerous  precedents  of  writs  of  quare  impedit  against  cor- 
porations, and  in  Vidian's  Ent.  i,  is  a  declaration  in  an  action  on 
the  case  (16  Car.  2),  against  the  Mayor  and  Commonalty  of  the 
city  of  Canterbury,  for  a  false  return  to  a  mandamus.     To  come 
to  more  modern  times,  it  was  held  in  the  ]Mayor  of  Lynn,  &c. 
(in  error)  v.  Turner  (Cowp.  86),  that  an  action  on  the  caseHes 
against  a  corporation   for  not  cleansing  and  keeping  in  repair^  a 
stream  of  navigable  water,  w^hich  it  was  bound  to  do  by  prescrip- 
tion,  in   consequence   of   which    the   plaintiff   was    injured.      This 
was  in  the  year  1774,  a  little  before  our  Revolution.     The  law^s 
of  the  Commonwealth   forbid  my  tracing  this  point  through  the 
English  courts,  since  the  Revolution,  but  we  shall  find  abundant 
authority   in   the   courts   of   our   own   country.      In    Gray    v.    The 
Portland  Bank  (6  Mass.  Rep.  364),  it  is  laid  down,  that  the  bank 
was  responsible  for  wrongs  done  by  itself  or  its  agents.     In  Rid- 
dle v.  The  Proprietors  of  the  Locks,  etc.,  on  Merrimack  River  (7 
Mass.  Rep.  169),  an  action  was  maintained  against  the  company 
for  damage  suffered  by  the  plaintiff'  in  consequence  of  the  locks 
not  being  kept  in  repair.     And  in  Townsend  v.  The  Susquehanna 
Turnpike  Company   (6  Johns,  91),  an  action  w^as  supported   for 
the  loss  of  a  horse  killed  by  the   falling  of  a  bridge,  which  the 
company  had  built  of  bad  materials.     These  authorities  put  it  be- 
yond doubt  that  the  form  of  action,  in  the  present  case,  is  good. 


GOODSPEED  V.   EAST  HADDAM   BANK. 

1853.     22  Conn.  530.  58  Am.  Dec.  439. 

Liability  for  Torts — Malice. 

CHURCH,  C.  J.:  This  action  is  based  upon  the  provisions  of 
our  statute,  entitled,  "An  act  to  prevent  vexatious  suits,"  and  is 
subject  to  the  same  general  principles  as  are  actions  on  the  case 
for  malicious  prosecutions,  at  common  law. 


176  LIABILITY  FOR  TORTS  AND  CRIMES. 

The  plaintiff  alleges,  that  the  defendants,  the  East  Haddam 
Bank,  a  body  politic  and  corporate,  without  probable  cause,  and 
with  a  malicious  intent  unjustly  to  vex,  harass,  embarrass,  and 
trouble  the  plaintiff,  commenced  by  a  writ  of  attachment,  and 
prosecuted  against  him,  a  certain  vexatious  suit  or  action  for 
fraudulent  representations,  to  the  injury  of  said  bank,  and  which 
action  resulted  in  a  verdict  and  judgment  against  the  bank,  and 
in  favor  of  the  present  plaintiff. 

On  the  trial  of  this  cause,  by  the  superior  court,  the  defendants 
moved  for  a  nonsuit,  on  the  ground  that  the  plaintiff  by  his  evi- 
dence had  failed  to  make  out  a  prima  facie  case;  which  motion 
the  court  granted,  and  judgment  of  nonsuit  was  entered  against 
the  plaintiff,  which  he  now  moves  to  set  aside. 

The  judgment  of  the  superior  court,  in  granting  the  nonsuit, 
as  we  understand,  was  founded  solely  upon  the  ground  that  a 
corporation  aggregate  was  not,  by  law,  liable  for  such  a  cause  of 
action  as  was  set  up  by  the  plaintiff,  in  his  declaration,  at  least, 
no  other  ground  of  nonsuit  or  objection  to  the  plaintiff's  action 
has  been  argued  before  us.  And,  therefore,  irrespective  of  the 
evidence  detailed  in  the  motion,  we  confine  ourselves  to  what  we 
suppose  to  be  the  sole  question  in  the  case. 

We  assume  that  the  plaintiff  has  sustained  the  damage  he 
claims,  by  reason  of  the  prosecution  of  the  vexatious  suit,  and 
the  question  is,  has  he  a  legal  remedy  against  the  bank? 

The  claim  of  the  defendants  is,  that  the  remedy  for  this  injury 
is  to  be  sought  against  the  directors  of  the  bank,  or  the  individ- 
uals, whoever  they  might  have  been,  by  whose  agency  the  vex- 
atious suit  was  prosecuted,  and  not  against  the  corporation.  We 
think,  that,  to  turn  the  plaintiff  round  to  pursue  the  proposed 
remedy,  would  be  trifling  with  him  and  with  his  just  rights,  and 
would  be  equivalent  to  declaring  him  remediless ;  and,  in  this  case, 
at  least,  that  there  was  a  wrong  where  there  is  no  remedy.  It  is 
notorious  that,  ordinarily,  the  action  of  bank  directors  is  private 
— that  their  records  do  not  disclose  the  names  of  the  individuals 
supporting  or  opposing  any  resolution  or  vote,  and  if  they  do, 
that  the  offending  persons  may  be  irresponsible  and  insolvent. 
The  language  of  Tilghman,  C.  J.,  in  a  case  very  similar  to  the 
present,  in  which  it  was  urged  that  a  corporation  was  not  liable 
for  a  suit,  but  only  the  individuals  committing  it,  is  applicable 
here.  "This  doctrine,"  he  said,  "was  fallacious  in  principle,  and 
mischievous  in  its  consequences,  as  it  tends  to  introduce  actual 
wrongs  and  ideal  remedies;  for  a  turnpike  company  might  do 
great  injury,  by  means  of  laborers  having  no  property  to  answer 
damages,"  &c.  (4  Serg.  &  Rawle,  16).  To  the  same  effect  is  the 
language  of  Shaw,  C.  J.,  in  the  case  of  Thayer  v.  Bastan  (19 
Pick.  511).  He  says,  "The  court  are  of  opinion,  that  this  argu- 
ment, if  pressed  to  all  its  consequences,  and  made  the  foundation 
of  an  inflexible  practical  rule,  would  often  lead  to  very  unjust 
results." 


GOODSPEED  V.   EAST    HADDAM    BANK.  I77 

Still  more  explicit  is  the  opinion  of  the  court,  in  the  case  of  The 
Life  and  Fire  Insurance  Company  v.  Mechanics'  Fire  Insurance 
Company  (7  Wend.  31).  There,  as  here,  it  was  contended,  that 
the  act  was  unauthorized,  and  must  therefore  be  considered  as 
the  act  of  the  officers  of  the  company,  and  not  of  the  company 
itself.  And  the  court  says,  "This  would  be  a  most  convenient 
distinction  for  corporations  to  establish :  that  every  violation  of 
their  charter  or  assumption  of  unauthorized  power,  on  the  part 
of  their  officers,  although  with  the  full  knowledge  and  approba- 
tion of  the  directors,  is  to  be  considered  the  individual  act  of  the 
officers,  and  is  not  to  prejudice  the  corporation  itself.  There 
would  be  no  possibility  of  ever  convicting  a  corporation  of  ex- 
ceeding its  powers,  and  thereby  forfeiting  its  charter,  or  incurring 
any  other  penalty,  if  this  principle  could  be  established." 

The  real  nature,  as  well  as  the  law,  of  corporations,  within  the 
last  half  century,  has  been  in  a  progress  of  development,  so  that 
it  has  grown  up,  from  a  few  rules  and  maxims,  into  a  code.  In 
the  days  of  Blackstone,  the  whole  subject  of  corporations,  and 
the  laws  affecting  them,  were  discussed  within  the  compass  of  a 
few  pages ;  now  volumes  are  required  for  this  purpose.  These 
institutions  have  so  multiplied  and  extended  within  a  few  years, 
that  they  are  connected  with,  and  in  a  great  degree  influence  all 
the  business  transactions  of  this  country,  and  give  tone  and  char- 
acter, to  some  extent,  to  society  itself.  We  do  not  complain  of 
this ;  but  we  say,  that,  as  new  relations  from  this  cause  are 
formed,  and  new  interests  created,  legal  principles  of  a  practical 
rather  than  of  a  technical  or  theoretical  character,  must  be  ap- 
plied. 

And  so,  in  the  course  of  this  progress,  it  has  been.  It  was  said 
by  Lord  Coke,  "that  corporations  had  neither  souls  nor  bodies;" 
and  by  somebody  else,  "that  they  had  no  moral  sense;"  and 
from  thence,  or  for  some  other  equally  insufficient  reason,  it  was 
inferred,  and  so  repeatedly  adjudged,  that  they  could  not  be  sub- 
jected in  actions  of  trover,  trespass,  or  disseisin,  and  indeed,  that 
they  could  not  commit  wrongs,  nor  be  liable  for  torts,  with  a  few 
exceptions,  as  we  shall  see. 

Had  Lord  Coke  lived  in  this  age  and  country,  he  would  have 
seen,  that  corporations,  instead  of  being  the  soulless  and  uncon- 
scious beings  he  supposed,  are  the  great  motive  powers  of  society, 
governing  and  regulating  its  chief  business  affairs;  that  they  act, 
not  only  upon  pecuniary  concerns,  but,  as  having  conscience  and 
motives,  to  an  almost  unlimited  extent,  they  are  entrusted  with 
the  benevolent  and  religious  agencies  of  the  day,  and  are  con- 
stituted trustees  and  managers  of  large  funds  promotive  of  such 
objects. 

The  views  of  the  old  lawyers  regarding  the  real  nature,  power, 
and  responsibilities  of  corporations,  to  a  great  extent  are  ex- 
ploded in  modern  times,  and  it  is  believed,  that  now  these  bodies 
are  brought  to  the  same  civil  liabilities  as  natural  persons,  so  far 
12 — Priv.me  Corp. 


178  LIABILITY  FOR  TORTS  AND  CRIMES. 

as  this  can  be  done  practically,  and  consistently  with  their  respec- 
tive charters.  And  no  good  reason  is  discovered  why  this  should 
not  be  so;  nor  why  it  cannot  be  done,  in  a  case  like  this,  without 
violating  any  sensible  or  useful  principle. 

And  although  it  was  truly  said,  and  for  obvious  reasons,  that 
corporations  could  not  be  punished  corporally,  as  traitors  or 
felons,  yet  they  may  be,  and  have  often  been,  subjected  to  fines 
and  forfeitures,  for  malfeasance,  and  even  to  the  loss  of  corporate 
life,  by  the  revocation  of  their  charters.  And  now  it  seems  to  be 
generally  admitted,  that  they  are  civilly  responsible,  in  their  cor- 
porate capacities,  for  all  torts  which  work  injury  to  others, 
whether  acts  of  omission  or  commission;  for  negligence  merely, 
and  for  direct  violence.  Yarborough  v.  Bank  of  Eng.,  16  East, 
6;  Beach  v.  Fulton  Bank,  7  Cowen,  486;  Foster  v.  Essex  Bank, 

17  Mass.  503 ;  Riddle  v.  Proprietors  of  Locks  and  Canals,  7  id. 
187;  Chestnut  Hill  Turnpike  v.  Rutter,  4  Serg.  &  Rawle,  16; 
4  Hammond,  500,  514;  10  Ohio  Rep.  159;  Dater  v.  Truy  Turn- 
pike Co.,  2  Hill,  630;  23  Pick.  139,  2  Bl.  Com.  476;  Ang.  & 
Ames,  392;  2  Kent  Com.  290;  i  Sw.  Dig.  75;  15  Ohio  Rep.  476; 

18  id.  229.  And  indeed,  no  actions  are  now  more  frequent,  in 
our  courts,  than  such  as  are  brought  against  corporations,  for 
torts,  either  in  case  or  trespass.  Harner  v.  New  Haven  &  North- 
ampton Canal  Co.,  14  Conn.  146,  and  the  cases  there  cited,  and 
many  others  since  reported.  In  a  late  case  in  England,  it  has 
been  adjudged,  adversely  to  former  opinions,  that  an  action  of  as- 
sault and  battery  may  be  sustained  against  a  corporation.  Eastern 
Cauhties  Railway  Co.  v.  Brooks,  2  Eng.  Law  &  Equity,  406. 
And  it  was  decided  long  ago,  that  a  corporation  was  liable  to 
an  action  for  a  false  return  to  a  writ  of  mandamus,  alleged  to 
have  been  made  falsely  and  maliciously.  16  East,  8;  14  Eng. 
Com.  Law,  159;  3  Mees.  &  Wels.  244;  Ang.  &  Ames,  ch.  10, 
sec.  9. 

In  all  the  cases,  wherein  it  has  been  holden  that  corporations 
may  be  subjected  to  civil  liabilities  for  torts,  the  acts  charged  as 
such  have  been  the  acts  of  their  constituted  authorities — either 
the  directors,  or  agents,  or  servants,  employed  by  them.  We  do 
not  intend  here  to  discuss  or  decide  the  frequently  suggested  ques- 
tion, how  far,  or  when  a  principal,  whether  an  individual  person 
or  a  corporation,  becomes  responsible  for  the  wilful  or  malicious 
act  of  his  servant  or  agent,  as  distinguished  from  his  mere  negli- 
gence, although  it  has  been  brought  into  the  argument  of  this 
case,  because  we  do  not  admit  that  the  present  case  falls  within 
the  operation  of  the  rule  of  law  on  this  subject,  even  as  the  de- 
fendants claim  it. 

The  truth  is,  the  action  complained  of  as  vexatious  was  insti- 
tuted by  the  bank,  in  the  name  of  the  bank,  and,  as  should  be 
presumed,  in  just  the  same  way  and  by  the  same  agencies  and 
means,  as  all  other  suits  by  these  institutions  are  commenced  and 
prosecuted,  and  nothing  appears  here,  showing  any  different  pro- 


GOODSPEED  V.   EAST   HADDAM    BANK.  1 79 

cedure  than  is  usual,  in  actions  by  corporations.  The  action  was 
brought  for  the  sole  benefit  of  the  bank,  for  the  recovery  of 
money  to  which  the  bank  was  entitled,  if  anybody,  and  for  an  in- 
jury sustained  by  the  bank  in  its  corporate  capacity.  The  bank, 
by  its  charter  and  the  general  laws,  had  power  to  sue  for  such  a 
cause  of  action;  and  what  seems  to  us  yet  more  conclusive,  is, 
that  if  this  suit  was  originated  by  the  misconduct  of  directors,  or 
any  officer  of  the  company,  it  has  never  been  repudiated,  and  may, 
by  the  acquiescence  of  the  bank,  be  considered  as  sanctioned  by  it. 
Ang.  &  Ames,  ch.  lo,  sec.  9.  No  act  of  agency  appears  here, 
which  does  not  appear  in  all  suits  brought  by  corporations,  and 
nothing  to  show  that  any  individuals  are,  or  ought  to  be,  made 
responsible  for  the  institution  and  prosecution  of  the  groundless 
suit,  as  distinct  from  the  corporation  itself. 

The  doctrine,  that  principals  are  not  responsible  for  the  wilful 
misconduct  of  their  agents,  as  seems  to  have  been  sanctioned  in 
the  cases  of  ]\IcManus  v.  Cricket,  i  East,  106;  Wright  v.  Wilcox, 
19  Wend.  343;  Vanderbilt  v.  Richmond  Turnpike  Co.,  2  Com- 
stock,  470;  but  denied  by  Chief  Justice  Reeve  in  his  Domestic 
Relations,  357,  we  think,  has  never  been  applied  to  such  a  case  as 
this,  but  only  to  the  acts  of  agents  or  servants,  properly  so 
called;  or  such  as  act  under  instructions  and  a  delegated  author- 
ity— persons  whose  duty  it  is  to  obey,  not  to  control;  as  attor- 
neys, cashiers,  _  or  others  employed  by  the  corporation.  The 
president  and  directors  of  a  bank,  instead  of  being  mere  servants, 
are  really  the  controlling  power  of  the  corporation — the  repre- 
sentatives, standing  and  acting  in  the  place  of  the  interested 
parties.  Indeed,  they  are  the  mind  and  soul  of  the  body  politic 
and  corporate,  and  constitute  its  thinking  and  acting  capacity. 
In  the  case  of  Barrell  v.  The  Nahant  Bank,  2  Met.  163,  Shaw, 
C.  J.,  expresses  and  defines  the  true  rule  of  appreciating  the  char- 
acter and  powers  of  bank  directors.  He  says,  "We  think  the 
exception  takes  much  too  limited  and  strict  a  view  of  the  powers 
of  bank  directors.  A  board  of  directors  is  a  body  recognized  by 
law.  By  the  laws  of  these  corporations,  and  by  the  usage,  so 
general  and  uniform  as  to  be  regarded  as  a  part  of  the  law  of  the 
land,  they  have  the  general  superintendence  and  active  manage- 
ment of  all  the  concerns  of  the  bank,  and  constitute,  to  all  pur- 
poses of  dealing  with  others,  the  corporation.  We  think  they  do 
not  exercise  a  delegated  authority  in  the  sense  to  which  the  rule 
applies  to  agents  and  attorneys,"  &c.  The  same  principle  is  very 
distmctly  recognized,  in  the  cases  of  Bank  Commissioners  v.  Bank 
of  Bufifalo,  6  Paige's  Ch.  502,  and  Life  and  Fire  Ins.  Co.  v. 
Mechanics'  Fire  Ins.  Co.,  7  Wend.  31.  It  has  been  said,  that  the 
stockholders  constitute  the  corporation.  It  may  be  so.  to  the  ex- 
tent to  which  they  have  the  power  to  act— a'nd  this  is  only  in 
the  choice  of  directors,  and  no  more.  Beyond  this,  thev  can  only 
be  considered  as  the  persons  for  whose  ultimate  individual  inter- 
est  the   corporation   acts.     The   directors   derive   all   their  power 


l80  LIABILITY   FOR  TORTS  AND  CRIMES. 

and  authority  from  the  charter  and  laws,  and  none  from  the 
stockholders. 

But  the  fear  is  expressed,  that,  by  thus  considering  and  treating 
the  character  and  acts  of  the  directors  of  a  bank  or  other  cor- 
poration, the  stockholders  are  subject  to  loss,  without  fault  of 
their  own.  This  may  to  some  extent  be  true;  but  the  protection 
of  the  law  in  this  matter  is  not  to  be  confined  to  stockholders ; 
the  public  and  strangers  have  rights  also.  The  stockholders  are 
volunteers,  and  they  have  consented  to  assume  the  risk  of  the 
faithful  or  unfaithful  management  of  the  corporation.  If,  in  this 
case,  one  of  two  innocent  persons  or  classes  is  to  suffer,  which 
should  it  be — that  one  which  is  brought  in  to  suffer  loss,  with- 
out its  consent  or  power  to  prevent  it,  or  the  one  which  has 
created  the  power  and  selected  the  persons  to  enforce  it? 

But,  after  all,  the  objection  to  the  remedy  of  this  plaintiff 
against  the  bank,  in  its  corporate  capacity,  is  not  so  much,  that, 
as  a  corporation,  it  cannot  be  made  responsible  for  torts  com- 
mitted by  its  directors,  as  that  it  cannot  be  subjected  for  that 
species  of  tort  which  essentially  consists  in  motive  and  intention. 
The  claim  is,  that,  as  a  corporation  is  ideal  only,  it  cannot  act 
from  malice,  and  therefore,  cannot  commence  and  prosecute  a 
malicious  or  vexatious  suit.  This  syllogism,  or  reasoning,  might 
have  been  very  satisfactory  to  the  schoolmen  of  former  days; 
more  so,  we  think,  than  to  the  jurist  who  seeks  to  discover  a 
reasonable  and  appropriate  remedy  for  every  wrong.  To  say 
that  a  corporation  cannot  have  motives,  and  act  from  motives, 
is  to  deny  the  evidence  of  our  senses,  when  we  see  them  thus  act- 
ing, and  effecting  thereby  results  of  the  greatest  importance, 
every  day.  And  if  they  can  have  any  motive,  they  can  have  a 
bad  one — they  can  intend  to  do  evil,  as  well  as  to  do  good.  If 
the  act  done  is  a  corporate  one,  so  must  the  motive  and  intention 
be.  In  the  present  case,  to  say  that  the  vexatious  suit,  as  it  is 
called,  was  instituted,  prosecuted,  and  subsequently  sanctioned 
by  the  bank,  in  the  usual  modes  of  its  action;  and  still  to  claim 
that,  although  the  acts  were  those  of  the  bank,  the  intention  was 
only  that  of  the  individual  directors,  is  a  distinction  too  refined, 
we  think,  for  practical  application. 

It  is  asked,  how  can  the  malice  of  a  corporation  be  proved?  It 
must  be  proved,  it  is  said,  as  well  as  alleged,  in  an  action  for  a 
malicious  prosecution  as  a  distinct  and  essential  fact;  and  the 
declarations  and  admissions  of  individual  members,  whether 
directors  or  others,  are  not  admissible  to  prove  it.  True,  malice 
must  be  proved,  and,  as  we  suppose,  very  much  in  the  same  man- 
ner as  it  is  proved  in  other  cases  of  a  similar  nature,  against  indi- 
vidual persons.  The  want  of  probable  cause  of  action  is  proof  of 
malice,  and  for  aught  we  know,  also,  tlie  records  of  the  bank 
may  show  it.  It  is  enough  to  say,  in  this,  as  In  all  other  cases, 
that  if  the  plaintiff  cannot,  In  some  legitimate  way,  prove  the 
malice  he  has  alleged,  he  cannot  recover;  but  we  have  no  right 


GOODSPEED  V.   EAST   HADDAM    BANK.  l8l 

to  assume  it  as  a  legal  principle,  that  it  cannot  be  proved.  We 
do  not  know  that  it  has  ever  been  adjudged  that  a  corporation 
is  civilly  responsible  for  a  libel.  But,  among  the  great  variety 
and  objects  of  these  institutions,  it  is  probable  that  the  news- 
paper press  has  come  in  for  its  share  of  the  privileges  supposed  to 
be  enjoyed  under  corporate  powers.  Proof  of  the  falsehood  of 
slanderous  charges  is  evidence  of  malice,  and  which  must,  as  in 
this  case,  be  proved;  but,  would  it  be  endured  that  an  associa- 
tion, incorporated  for  the  purpose  suggested,  could,  with  impun- 
ity, assail  the  character  and  break  down  the  peace  and  happiness 
of  the  good  and  virtuous,  and  the  law  afford  no  remedy,  except 
by  a  resort  to  insolvent  and  irresponsible  type-setters,  and  for  no 
better  reason  than  that  a  corporation  is  only  an  ideal  something, 
of  which  malice  or  intention  cannot  be  predicated?  And,  if,  as 
we  have  suggested,  the  directors  are,  for  all  practical  purposes, 
the  corporation  itself,  acting  at  least  as  its  representatives,  we 
can  see  no  greater  difficulty  in  proving  their  motives  good  or  bad, 
than  in  thus  proving  the  motives  of  other  associated  or  conspir- 
ing bodies. _  We  are  sure  that  this  objection  of  the  defendants 
was  not  discovered,  or  was  not  regarded  as  sufficient,  nor  the 
difficulty  of  proving  malice  upon  a  corporation  felt,  when  the 
case  of  Merrills  v.  The  Tariff  Manufacturing  Co.,  lo  Conn.  R. 
384,  was  tried  at  the  circuit,  and  discussed  and  decided  by  this 
court.  That  was  an  action  against  a  corporation  for  a  malicious 
injury,  and  the  sole  question  in  this  court  was,  whether,  by  rea- 
son of  the  malicious  intent,  the  company  was  liable  for  aggra- 
vated or  vindictive  damages;  and  it  was  holden  to  be  thus  liable, 
in  a  very  elaborate  opinion,  drawn  up,  and  strongly  expressed, 
by  Huntington,  J. 

The  interests  of  the  community,  and  the  policy  of  the  law  de- 
mand that  corporations  should  be  divested  of  every  feature  of  a 
fictitious  character  which  shall  exempt  them  from  the  ordinary 
liabilities  of  natural  persons,  for  acts  and  injuries  committed  by 
them  and  for  them.  Their  immunities  for  wrongs  are  no  greater 
than  can  be  claimed  by  others,  and  they  are  entitled  to  an  equal 
protection,  for  all  their  rights  and  privileges,  and  no  more. 

For  the  reasons  suggested,  a  majority  of  tlit  court  is  of  opinion 
that  the  nonsuit  granted  by  the  superior  court  should  be  set  aside, 
and  a  new  trial  granted. 

In  this  opinion,  Waite,  J.,  concurred. 


l82  LIABILITY   FOR  TORTS  AND  CRIMES. 

NIMS  V.  MOUNT  HERMON  BOYS'  SCHOOL. 

1893.     160  Mass.  177,  35  N.  E.  'j'jd,  22  L.  R.  A.  364,  39  Am. 

St.  467. 

Ultra  Vires  Torts. 

KNOWLTON,  J. — The  defendant  is  an  educational  corporation. 
The  plaintiff  seeks  to  recover  damages  for  an  injury  received 
through  the  negligence  of  a  ferryman  in  managing  a  boat  on  which 
he  was  a  passenger,  and  which,  as  he  alleges,  the  defendant  was 
using  at  a  public  ferry  in  the  business  of  carrying  passengers  for 
hire.  At  the  request  of  the  defendant,  the  presiding  justice  ruled 
that  there  was  no  evidence  to  warrant  a  finding  for  the  plaintiff, 
and  directed  a  verdict  for  the  defendant.  The  defendant  contends 
that  the  ruling  should  be  sustained  on  one  or  both  of  two  grounds. 
It  says  in  the  first  place,  that,  if  it  maintained  the  ferry  and 
hired  and  paid  the  ferryman,  the  business  was  ultra  vires,  and 
therefore  it  is  not  liable  for  negligence  in  the  management  of  the 
boat.  Secondly,  it  contends  that  there  was  no  evidence  to  connect 
the  corporation  with  the  business  of  running  the  ferry-boat,  or  to 
show  that  the  ferryman  was  its  servant. 

It  is  a  general  rule  that  corporations  are  liable  for  their  torts  as 
natural  persons  are.  It  is  no  defense  to  an  action  for  a  tort  to 
show  that  the  corporation  is  not  authorized  by  its  charter  to  do 
wrong.  Recovery  may  be  had  against  corporations  for  assault  and 
battery,  for  libel  and  for  malicious  prosecution,  as  well  as  for  torts 
resulting  from  negligent  management  of  the  corporate  business. 
Moore  v.  Fitchburg  Railroad,  4  Gray,  465 ;  Reed  v.  Home  Savings 
Bank,  130  Mass.  443;  Fogg  v.  Boston  &  Lowell  Railroad,  148 
Mass.  513;  Philadelphia,  Wilmington  &  Baltimore  Railroad  v. 
Quigley,  21  How.  202,  209;  Merchants'  Bank  v.  State  Bank,  10 
Wall.  604;  National  Bank  v.  Graham,  100  U.  S.  699;  Gruber  v. 
Washington  &  Jamesville  Railroad,  92  N.  C.  i ;  Hussey  v.  Nor- 
folk Southern  Railroad,  98  N.  C.  34.  If  a  corporation  by  its  offi- 
cers or  agents  unlawfully  injures  a  person,  whether  intentionally 
or  negligently,  it  would  be  most  unjust  to  allow  it  to  escape  re- 
sponsibility on  the  ground  that  its  act  is  ultra  vires.  The  only 
plausible  ground  on  which  the  defendant  in  the  present  case  can 
contend  that  it  should  be  exempt  from  liability  for  the  negligence 
of  its  servant  in  managing  the  ferry-boat  is  that  the  contract  to 
carry  the  plaintiff  was  ultra  vires,  and  therefore  invalid,  and  that 
the  duty  for  neglect  of  which  the  plaintiff  sues  arose  out  of  the 
contract,  and  disappears  with  it  when  the  contract  appears  to  be 
void.  The  defendant  may  argue  that  the  plaintiff  cannot  maintain 
an  action  for  a  breach  of  the  contract  to  use  proper  care  to  carry 
him  safely,  and  that  he  stands  no  better  when  he  sues  in  tort  for 
failure  to  do  the  duty  which  grew  out  of  the  contract. 

In  Bissell  v.  Michigan  Southern  &  Northern  Indiana  Railroad, 


NIMS   V.    MOUNT    HERMON    BOYS'    SCHOOL.  183 

22  N.  Y.  258,  the  plaintiff  founded  his  action  on  the  negligence  of 
the  two  defendants  while  jointly  running  cars  on  a  railroad  in  a 
State  to  which  the  charter  of  neither  of  them  extended,  and  it  was 
conceded  that  the  defendants  were  acting  ultra  vires.  The  plain- 
tiff recovered,  Comstock,  C.  J.,  holding  in  an  elaborate  opinion 
that  the  corporations  were  liable  under  their  contract,  notwith- 
standing that  the  contract  w'as  ultra  vires,  and  that  if  they  could 
not  be  held  under  their  contract  they  could  not  be  held  at  all,  in- 
asmuch as  the  only  negligence  alleged  was  a  failure  to  use  the 
care  which  the  contract  called  for.  Selden,  J.,  in  an  equally  full 
and  elaborate  opinion,  held  that  the  contract  for  carriage  was  in- 
valid, and  that  there  could  be  no  recovery  under  it,  nor  for  neg- 
ligence founded  upon  it;  but  it  was  his  opinion  that,  if  the  con- 
tract were  set  aside,  the  defendants  owed  the  plaintiff  a  duty 
founded  on  his  relation  to  them  as  an  occupant,  with  their  per- 
mission, of  a  place  in  their  car,  and  that  the  improper  manage- 
ment of  the  car  was  a  neglect  of  that  duty  wdiich  the  plaintiff 
could  recover.  Gierke,  ].,  agreed  with  this  view,  and  all  but  one 
of  the  other  judges  concurred  in  a  decision  for  the  plaintiff,  with- 
out stating  the  ground  on  which  they  thought  the  decision  should 
be  placed.  This  case  was  followed  in  Buffet  v.  Troy  &  Boston 
Railroad,  40  N.  Y.  i68,  in  which  it  was  held  that  a  railroad  cor- 
poration was  liable  for  negligence  of  the  driver  of  a  stage-coach 
W'hich  it  was  running  without  a  legal  right  to  do  a  business  of 
that  kind;  but  the  opinion  does  not  show  wdiether  the  decision  is 
founded  on  the  opinion  of  Comstock,  C.  J.,  given  in  the  former 
case,  or  on  that  of  Selden,  J.  Like  decisions  have  been  made 
under  similar  facts  in  Central  Railroad  &  Banking  Co.  v.  Smith, 
76  Ala.  572;  New  York,  Lake  Erie  &  Western  Railway  v.  Har- 
ing,  18  Vroom,  137;  and  Hutchinson  v.  Western  &  Atlantic  Rail- 
road, 6  Heisk.  634. 

The  better  doctrine  seems  to  be  that  a  contract  made  by  a  cor- 
poration in  violation  of  its  charter,  or  in  excess  of  the  powers 
granted  to  it  either  expressly  or  by  implication,  is  invalid  con- 
sidered merely  as  a  contract,  and,  so  long  as  it  is  entirely  execu- 
tory, will  not  be  enforced.  It  is  not  only  a  violation  of  a  private 
trust,  viewed  in  reference  to  the  stockholders,  but  it  is  against 
the  policy  of  the  law,  which  intends  that  corporations  deriving 
their  powers  solely  from  the  Legislature  shall  not  pass  beyond 
the  limits  of  the  field  of  activity  in  which  they  are  permitted  by 
their  charter  to  work.  Monimient  National  Bank  v.  Globe  Works, 
loi  Mass.  57;  Attorney  General  v.  Tudor  Ice  Co..  104  Mass.  239; 
Davis  V.  Old  Colonial  Railroad,  131  Mass.  258;  Thomas  v.  Rail- 
road Co..  loi  U.  S.  71;  Leslie  v.  Lorillard,  no  N.  Y.  519;  Lin- 
kauf  V.  Lombard,  137  N.  Y.  417;  East  Anglian  Railways  v.  East- 
ern Counties  Railway,  ii  C.  B.  775,  803.  On  the  other  hand, 
courts  have  frequently  held  that,  while  such  contracts  considered 
merely  as  contracts  are  invalid,  they  involve  no  such  element  of 
moral  or  legal  wrong  as  to  forbid  their  enforcement  if  there  has 


184  LIABILITY   FOR  TORTS  AND  CRIMES. 

been  such  action  under  them  as  to  work  injustice  if  they  are  set 
aside.  Courts  have  been  astute  to  discover  something  in  the 
nature  of  an  equitable  estoppel  against  one  w^lio,  after  entering 
into  such  a  contract,  and  inducing  a  change  of  condition  by  an- 
other party,  attempts  to  avoid  the  contract  by  a  plea  of  ultra 
vires.  It  is  said  that  such  a  plea  will  not  avail  when  to  allow  it 
would  work  injustice  and  accomplish  legal  wrong.  Leslie  v. 
Lorillard,  no  N.  Y.  519;  Linkauf  v.  Lombard,  137  N.  Y.  417, 
423.  Many  cases  might  be  supposed  in  which  it  would  be  most 
unjust  to  hold  that  one  who  had  received  the  benefits  of  such  a 
contract  might  retain  them  and  leave  the  other  party  without 
remedy,  as  he  might  do  in  a  supposable  case,  where  another  had 
put  himself  at  a  disadvantage  on  the  faith  of  a  contract  with  him 
to  commit  a  crime.  Whether  in  this  Commonwealth  a  contract 
entered  into  by  a  corporation  ultra  vires,  and  partly  performed, 
will  ever  be  enforced  on  equitable  grounds,  we  need  not  now  de- 
cide. See  McCluer  v.  Manchester  &  Lawrence  Railroad,  13  Gray, 
124;  National  Pemberton  Bank  v.  Porter,  125  Mass.  333;  Attle- 
borough  National  Bank  v.  Rogers,  125  Alass.  339;  Atlas  National 
Bank  v.  Savery,  127  Mass.  75-77;  Slater  Woollen  Co.  v.  Lamb, 
143  Mass.  420;  Prescott  National  Bank  v.  Butler,  157  Mass.  548; 
National  Bank  v.  Mathews,  98  U.  S.  621 ;  National  Bank  v. 
Whitney,  103  U.  S.  99;  Parish  v.  Wheeler,  22  N.  Y.  494;  Oil 
Creek  &  Allegheny  River  Railroad  v.  Pennsylvania  Transporta- 
tion Co.,  83  Penn.  St.  160;  Bradley  v.  Ballard,  55  111.  413.  In  the 
present  case  we  think  it  makes  no  difiference  that  the  defendant 
was  not  a  manufacturing  or  trading  corporation,  but  was  char- 
tered for  educational  purposes  only.  It  could  acquire  and  hold 
property,  make  contracts,  and  do  anything  else  incidental  to  the 
maintenance  of  the  school.  Doubtless  some  of  its  officers  or 
agents  thought  it  would  be  an  advantage  to  its  students  and  man- 
agers to  have  a  public  ferry  at  the  place  where  the  plaintiff  was 
injured.  Its  maintenance  of  such  a  ferry  was  ultra  vires,  but  its 
acts  in  that  respect  were  not  different  in  kind  from  the  ordinary 
acts  of  corporations  in  excess  of  the  powers  given  them  by  their 
charter.  We  are  of  opinion,  therefore,  that  if  the  defendant  while 
running  the  ferry-boat  accepted  the  plaintiff  as  a  passenger  to  be 
transported  for  hire,  and  undertook  to  carry  him  across  the  river, 
he  was  in  the  boat  as  a  licensee,  it  owed  him  the  duty  to  use 
proper  care  to  carry  him  safely,  and,  whether  an  action  could  be 
maintained  for  a  breach  of  the  contract  or  not,  it  is  liable  to  the 
plaintiff  in  an  action  of  tort  for  neglect  of  that  duty. 

The  other  question  in  the  case  is  whether  there  was  evidence 
that  the  corporation  operated  the  ferry.  Under  its  by-laws  the 
management  of  the  corporation  is  vested  in  a  board  of  trustees. 
It  does  not  appear  that  any  vote  was  ever  taken  in  regard  to  the 
ferry,  and  it  was  not  shown  that  any  officer  of  the  corporation 
took  out  the  license  which  was  granted  to  the  defendant  by  the 
county  commissioners,   under   Pub.    Sts.   c.   55,    §   i,   to   keep   the 


NIMS   V.    MOUNT    HERMON    BOYS'    SCHOOL.  185 

ferry,  but  the  records  of  the  county  commissioners  show  that  such 
a  license  was  granted,  and  that  a  bond  with  sureties  was  given  to 
the  county  of  FrankUn,  with  the  condition  properly  to  perform 
the  duty  of  a  ferryman,  executed  in  behalf  of  the  defendant  by 
one  who  was  designated  as  superintendent,  and  witnessed  by  the 
defendant's  cashier  and  paymaster.  It  further  appeared  that  the 
title  to  the  property  used  at  the  ferry  was  taken  by  Ambert  G. 
Moody,  one  of  the  trustees  of  the  defendant,  who  was  then  a 
student  in  Amherst  College,  and  that  he  paid  for  it  only  a  nomi- 
nal sum  above  the  mortgage  existing  upon  it,  and  that  he  and  the 
defendant's  superintendent,  who  had  charge  of  its  farm,  employed 
one  Deane  to  operate  the  ferry,  who  was  paid  by  the  month,  and 
who  turned  over  the  balance  of  the  receipts  of  the  ferry  above 
his  wages  to  the  defendant's  cashier  and  paymaster.  For  the 
month  of  April,  Deane  was  paid  for  his  services  by  the  defend- 
ant's paymaster  out  of  the  defendant's  funds.  In  June,  1890,  a 
new  ferry-boat  was  constructed  under  an  arrangement  with  Am- 
bert G.  Aloody  and  Dwight  L.  Moody,  both  of  whom  were  trus- 
tees of  the  corporation,  and 'was  paid  for  by  the  paymaster  out 
of  the  funds  of  the  corporation.  For  six  months,  and  until  there 
was  a  change  in  the  management  of  the  ferry,  the  defendant's 
cashier  and  paymaster  sent  to  the  treasurer,  who  lived  in  New 
York,  monthly  accounts,  showing  monthly  receipts  and  expenses 
on  account  of  the  ferry.  Accompanying  the  first  of  these  ac- 
counts was  a  statement  that  the  school  was  running  the  ferry 
and  paying  the  bills.  The  treasurer  was  himself  a  trustees  of  the 
corporation.  He  subsequently  rendered  his  official  report  to  the 
corporation,  which  was  audited  by  another  of  the  trustees,  who 
did  not  examine  the  items  in  person,  but  caused  the  examination 
to  be  made  by  a  man  in  his  employment.  This  report  was  ac- 
cepted by  the  trustees  and  placed  on  file.  The  items  of  receipts 
and  expenditures  were  entered  on  the  books  of  the  treasurer  in 
an  account  under  the  title  "ferry."  The  treasurer's  report  was  not 
put  in  evidence,  and  was  not  produced,  although  the  defendant 
was  notified  to  produce  it. 

There  is  no  evidence  of  original  authority  from  the  defendant 
to  anybody  to  operate  the  ferry  on  its  account,  but  the  evidence  is 
plenary  that  persons  conected  with  the  management  of  its  business 
assumed  so  to  operate  it.  The  important  question  is  whether 
there  was  evidence  that  the  corporation  ratified  the  acts  of  these 
persons.  We  are  of  opinion  that  there  was  evidence  from  which 
the  jury  might  have  found  such  ratification.  It  is  not  necessary 
that  the  ratification  should  be  by  a  formal  vote.  It  is  enough  if 
the  corporation,  acting  through  its  managing  officers,  knowing 
that  the  business  had  been  done  by  those  who  assumed  to  act  as 
its  agents  in  doing  it,  and  that  the  income  of  the  business  had 
been  received  and  the  expenses  of  it  paid  by  its  treasurer  in  his 
official  capacity,  and  that  the  balance  of  the  receipts  above  the 
expenditures  was  in  its  treasury,  adopted  the  action  of  its  treas- 


l86  LIABILITY  FOR  TORTS  AND  CRIMES. 

urer,  and  elected  to  keep  the  money.  It  was  a  fair  inference  of 
fact,  especially  when  the  corporation  failed  to  produce  the  treas- 
urer's report  after  notice  to  produce  it,  that  the  report  contained 
a  true  statement  of  the  accounts  which  related  to  the  ferry,  and 
that  it  was  accepted  with  full  knowledge  on  the  part  of  the  trus- 
tees of  what  it  contained.  Whether  there  was  a  ratification  by 
the  corporation  was  a  question  of  fact  for  the  jury  on  all  the 
evidence. 

If  there  was  such  a  ratification,  it  carried  with  it  the  conse- 
quences which  would  have  followed  an  original  authority.  In 
Dempsey  v.  Chambers,  154  Mass.  330,  it  was  held,  after  much 
consideration,  that  ratification  of  an  unauthorized  act  would  make 
the  principal  liable  in  an  action  of  tort  for  an  injury  resulting 
from  negligence  of  the  agent  in  doing  the  act. 

We  are  of  opinion  that  the  case  should  have  been  submitted  to 
the  jury. 

Exceptions  sustained. 


HANNON  V.   SIEGEL-COOPER  CO. 
1901.     167  N.  Y.  244,  60  N.  E.  597,  52  L.  R.  A.  429. 

Appeal  from  a  judgment  of  the  Appellate  Division  of  the  Su- 
preme Court  in  the  second  judicial  department,  entered  June  15, 
1900,  affirming  a  judgment  in  favor  of  plaintiff  entered  upon  a 
verdict  and  an  order  denying  a  motion  for  a  new  trial. 

The  nature  of  the  action  and  the  facts,  so  far  as  material,  are 
stated  in  the  opinion, 

CULLEN,  J. — The  complaint  charged  that  the  defendant,  a 
corporation,  conducting  a  department  store  in  the  city  of  New 
York,  represented  and  advertised  itself  as  carrying  on  the  practice 
of  dentistry  in  one  of  its  departments;  that  the  plaintiff  employed 
the  defendant  to  render  the  necessary  professional  labor  in  the 
treatment  of  her  teeth  and  paid  therefor;  that  the  defendant's 
servant  performed  said  work  so  carelessly,  negligently  and  unskill- 
fully  that  plaintiff's  jaws  and  gums  were  injured,  for  which  mal- 
practice she  claimed  damages.  The  answer  in  substance  was  a 
general  denial.  Plaintiff  had  a  verdict  at  the  Trial  Term  and  the 
judgment  on  that  verdict  has  been  unanimously  affirmed  by  the 
Appellate  Division. 

The  Public  Health  Law  by  section  164  makes  it  a  misdemeanor 
for  any  person  to  practice  or  to  hold  himself  out  to  the  public  as 
practicing  dentistry  in  any  county  in  this  state  without  being  li- 
censed to  practice  as  such  and  registered  in  the  office  of  the  clerk 
of  the  county,  and  it  would  seem  that  the  action  of  the  defendant 
in  assuming  to  carry  on  the  business  of  dentistry  was  illegal  and 
ultra  vires.     But  though  it  was  beyond  the  corporate  powers  of 


HANNON    V.    SIEGEL-COOPER    CO.  187 

the  defendant  to  engage  in  the  business  this  does  not  relieve  it 
from  the  torts  of  its  servants  committed  therein  (Bissell  v.  Mich. 
Southern  R.  R.  Co.,  22  N.  Y.  258),  and  the  unanimous  affirmance 
of  the  Appellate  Division  is  conclusive  to  the  effect  that  it  either 
practiced  dentistry  or  held  itself  out  as  practicing  dentistry.     The 
only  question  cognizable  by  us  arises  upon  the  appellant's  excep- 
tion to  the  following  charge  of  the  trial  court:     "If  the  defend- 
ants in  this  case  made  representations  to  the  plaintiff,  on  which 
she  relied,  that  they  were  conducting  a  dentist  business  in  their 
store,  and  if  she,  because  of  those  representations,  hired  the  work- 
man in  the  store  of  the  defendants,  with  no  knowledge  that  the 
business  was  conducted  by  Mr.  Hayes  individually,  you  may  find 
the  defendants  responsible  for  the  acts  of  the  dentist  who  treated 
the  plaintiff,  even  though  Mr.   Hayes,  as  a  matter  of  fact,  was 
the  real  owner  of  that  department  of  the  defendant's  store."    The 
appellants'  counsel  does  not  deny  the  general  doctrine  that  a  per- 
son is  estopped  from  denying  his  liability  for  the  conduct  of  one 
whom  he  holds  out  as  his  agent  against  persons  who  contract  with 
him  on  the  faith  of  the  apparent  agency,  but  he  insists  that  the 
doctrine  does  not  apply  to  the  present  case,  because  the  action  is 
brought  in  tort  and  not  on  contract.     It  may  very  w^ell  be  that 
where  the  duty,  the  violation  of  which  constitutes  the  tort  sued 
for,  springs  from  no  contract  with,  nor  relation  to,  the  principal, 
a  party  would  not  be  estopped  from  denying  that  the  \vrongdoer 
was  his  agent,  even  though  he  had  held  him  out  as  such.     In  such 
a  case  the  representation  of  the  principal  would  be  no  factor  in 
producing  the  injury  complained  of.     But  whenever  the  tort  con- 
sists  of  a  violation  of  a  duty  which  springs   from  the  contract 
between  the  parties,  the  ostensible  principal  should  be  liable  to  the 
same  extent  in  an  action  ex  delicto  as  in  one  ex  contractu.     It  is 
urged  that  the  representation  that  the  operating  dentists  were  the 
defendant's   servants   did  not  mislead  the  plaintiff  to  her  injury 
and,  therefore,  should  not  estop  the  defendant  from  asserting  the 
truth.     There  is  no  force  in  this  claim.     If  A  contracts  with  the 
ostensible  agent  of  B  for  the  purchase  of  goods,  he  relies  not  only 
on  the  business  reputation  of  B,  as  to  the  goods  he  manufactures 
or  sells,  but  on  the  pecuniary  responsibility  of  B  to  answer   for 
any  default  in  carrying  out  the  contract.     So  here  the  plaintiff  had 
a  right  to  rely  not  only  on  the  presumption  that  the  defendant 
would  employ  a   skillful   dentist  as   its  servant,  but  also  on   the 
fact  that  if  that  servant,  whether  skillful  or  not,  was  guilty  of 
any  malpractice,  she  had  a  responsible  party  to  answer  therefor 
in  damages. 

The  judgment  appealed   from  should  be  affirmed,  with  costs. 

O'Brien,    Bartlett,    ]\rartin,    Vann    and    Landon,    JJ.,    concur; 
Parker,  Ch.  J.,  takes  no  part. 

Judgment  affirmed.^ 

^  In  the  following  cases,  corporations  were  held  liable  for  torts  com- 
mitted in  the  course  of  an  ultra  vires  undertaking.     South  etc.  R.  Co.  v. 


1 88  LIABILITY   FOR  TORTS  AND   CRIMES. 

UNITED  STATES  v.  JOHN  KELSO  CO. 

1898.     86  Fed.  304. 

Criminal  Liability— Violation   of  Eight   Hour  Law. 

DE  HAVEN,  J.— On  October  9,  1897,  there  was  filed  in  this 
court  by  the  United  States  district  attorney  for  this  district,  an 
information  charging  the  defendant,  a  corporation,  with  the  vio- 
lation of  "An  Act  relating  to  the  limitation  of  the  hours  oi  daily 
service  of  laborers  and  mechanics  employed  upon  the  public  works 
of  the  United  States  and  of  the  District  of  Columbia,"  approved 
August  I,  1892  (2  Supp.  Rep.  St.  p.  62).    Upon  the  filing  of  this 
information,  the  court,  upon  motion  of  the  district  attorney  di- 
rected that  a  summons  be  served  upon  said  corporation.    The  sum- 
mons stated  generally  the  nature  of  the  charge,  and  for  a  more 
complete   statement  of  such   offense   referred  to  the   information 
on  file.     On  the  day  named  in  said  summons  for  its  appearance, 
the  defendant  corporation  appeared  specially  by  its  attorney,  and 
moved  to  quash  the  summons,  and  to  set  aside  the  service  thereof, 
upon  grounds  hereinafter  stated.     Upon  the  argument  of  this  mo- 
tion, it  was  claimed  in  behalf  of  the  defendant:     First,  that  the 
Act  of  Congress  above  referred  to  does  not  apply  to  corporations, 
because  the  intention  is  a  necessary  element  of  the  crime  therein 
defined,  and  a  corporation  as  such  is  incapable  of  entertaining  a 
criminal  intention;  second,  that,  conceding  that  a  corporation  may 
be  guilty  of  a  violation  of   said  act.  Congress   has   provided  no 
mode  for  obtaining  jurisdiction  of  a  corporation  in  a  criminal  pro- 
ceeding, and  for  that  reason  the  summons  issued  by  the  court  was 
unauthorized  by  law,  and  its  service  a  nullity.     It  will  be  seen  that 
the  first  objection  goes  directly  to  the  sufficiency  of  the  informa- 
tion, and  presents  precisely  the  same  question  as  would  a  general 
demurrer,  attacking  the  information  on  the  ground  of  an  alleged 
failure  to  charge  the  defendant  with  the  commission  of  a  public 
offense.     This  objection  is  one  which  would  not  ordinarily  be  con- 
sidered upon  a  motion  like  that  now  before  the  court,  when  the 
party  making  the  objection  refuses  to  acknowledge  the  jurisdiction 
of  the  court,  or  to  make  any  other  than  a  special  appearance  for 
the  purpose  of  attacking  its  jurisdiction;  but,  in  view  of  the  con- 
clusion which  I  have  reached  upon  the  second  point  urged  by  the 
defendant,  it  becomes  necessary  for  me  to  determine  whether  the 
Act  of  Congress  above  referred  to  is  applicable  to  a  corporation, 

Chappell  (1878),  61  Ala.  527;  New  York  etc.  R.  Co.  v.  Haring  (1885), 
47  N.  J.  Law  137;  Bissell  v.  Michigan  etc.  R.  Co.  (1860),  22  N.  Y.  258 
(per  Selden.  J.);  Fishkill  Savings  Institution  v.  National  Bank  (1880), 
80  N.  Y.  162;  Gruber  v.  Washington  etc.  R.  Co.  (1885),  92  N.  Car.  1; 
Hutchinson  v.  Western  etc.  R.  Co.  (1871),  6  Heisk.  (Tenn.)  634;  Zinc 
Carbonate  Co.  v.  First  Nat.  Bank  (1899),  103  Wis.  125,  79  N.  W.  229; 
National  Bank  v.  Graham  (1879),  100  U.  S.  699,  25  L.  ed.  750  ("Cor- 
porations are  liable  for  every  wrong  they  commit,  and  in  such  cases 
the  doctrine  of  nlfra  vires  has  no  application");  Chesapeake  &  Ohio  R. 
Co.  V.  Howard  (1900),  178  U.  S.  153,  44  L.  ed.  1015,  20  Sup.  Ct.  880.— Ed. 


UNITED  STATES  V.   JOHN    KELSO   CO.  189 

and  whether  a  corporation  can  be  guilty  of  the  crime  of  violating 
the  provisions  of  said  act.     Section  i  of  that  act  makes  it  unlaw- 
ful   for   a   contractor   or   sub-contractor   upon    any    of   the    public 
works  of  the  United   States,  whose  duty  it  shall   be  to  employ, 
direct,  or  control  the  services  of  laborers  or  mechanics  upon  such 
public  works,  "to  require  or  permit  any  such  laborer  or  mechanic 
to  work  more  than  eight  hours  in  any  calendar  day  except  in  case 
of  extraordinary  emergency."     And  section  2  of  the  act  provides 
"that     *     *     *     any  contractor  whose  duty  it  shall  be  to  employ, 
direct,   or   control    any   laborer   or   mechanic   employed    upon    any 
public  works  of  the  United  States     *     *     *     who  shall  intention- 
ally violate  any  provision  of  this  act,  shall  be  deemed  guilty  of  a 
misdemeanor,  and  for  each  and  every  offense  shall  upon  convic- 
tion be  punished  by  a  fine  not  to  exceed  one  thousand  dollars  or 
by  imprisonment  for  not  more  than  six  months,  or  by  both  such 
fine  and  imprisonment,  in  the  discretion  of  the  court  having  juris- 
diction thereof."    It  will  be  observed  that  by  the  express  language 
of  this  statute  there  must  be  an  intentional  violation  of  its  pro- 
visions, in  order  to  constitute  the  offense  which  the  statute  defines. 
In  view   of  this   express   declaration,   it  is   claimed   in  behalf   of 
defendant  that  the  act  is  not  applicable  to  corporations,  because 
it  is  not  possible  for  a  corporation  to  commit  the  crime  described 
in  the  statute.     The  argument  advanced  to  sustain  this  position 
is,    in   substance,   this :     That   a   corporation   is    only   an   artificial 
creation,  without  animate  body  or  mind,  and  therefore,   from  its 
very  nature,  incapable  of  entertaining  the  specific  intention  which, 
by  the  statute,  is  made  an  essential  element  of  the  crime  therein 
defined.     The  case  of   State  v.   Great  Works   ]\I.   &   M.   Co.,   20 
Me.  41,  supports  this  proposition,  and  it  must  be  conceded  that 
there  are  to  be  found  dicta  in  many  other  cases  to  the  effect  that 
a  corporation  is  not  amenable  to  prosecution  for  a  positive  act  of 
misfeasance,  involving  a  specific  intention  to  do  an  unlawful  act. 
In  a  general  sense,  it  may  be  said  that  no  crime  can  be  committed 
without  a  joint  operation  of  act  and  intention.     In  many  crimes, 
however,  the  only  intention  required  is  an  intention  to  do  the  pro- 
hibited act — that  is  to  say,  the  crime  is  complete  when  the  pro- 
hibited act  has  been  intentionally  done ;  and  the  more  recent  and 
better  considered  cases   hold  that  a  corporation   may   be   charged 
with   an  offense  which   only  involves   this  kind   of   intention,   and 
may  be  properly  convicted  when,  in  its  corporate  capacity,  and  by 
direction  of  those  controlling  its  corporate  action,  it  does  the  pro- 
hibited act.     In  such  a  case  the  intention  of  its  directors  that  the 
prohibited  act  should  be  done  is  imputed  to  the  corporation  itself. 
State  v.   IMorris   E.   R.   Co.,  23   N.  J.  Law,   360;  Reg.   v.   Great 
North  of  England  Ry.  Co.,  58  E.  C.  L.  315;  Com.  v.  Proprietors 
of  New  Bedford  Bridge,  2  Gray.  339.     See,  also,  State  v.  Balti- 
more &  O.  R.  Co..   15  W.  \''a.  380.     That  a  corporation  may  be 
liable  civilly  for  that  class  of  torts  in  which  a  specific  malicious 
intention  is  an  essential  element  is  not  disputed  at  this  day.     Thus 


190 


LIABILITY   FOR  TORTS  AND   CRIMES. 


an  action  for  malicious  prosecution  will  lie  against  a  banking  cor- 
poration. Reed  v.  Bank,  130  Mass.  434;  Goodspeed  v.  Bank,  22 
Conn.  530.  An  action  will  lie  also  against  a  corporation  for  a 
malicious  libel.  Railroad  Co.  v.  Quigley,  21  How.  202;  Maynard 
V.  Insurance  Co.,  34  Cal.  48.  The  opinion  in  the  latter  case,  de- 
livered by  Currey,  C.  J.,  is  an  able  exposition  of  the  law  relatmg 
to  the  liability  of  corporations  for  malicious  libel,  and  in  the 
course  of  which  that  learned  judge,  in  answer  to  the  contention 
that  corporations  are  mere  legal  entities  existing  only  in  abstract 
contemplation,  utterly  incapable  of  malevolence,  and  without  power 
to  will  good  or  evil,  said: 

"The  directors  are  the  chosen  representatives  of  the  corporation, 
and  constitute,  as  already  observed,  to  all  purposes  of  dealing  with 
others,  the  corporation.  What  they  do  within  the  scope  of  the 
objects  and  purposes  of  the  corporation,  the  corporation  does.  If 
they  do  any  injury  to  another,  even  though  it  necessarily  involves 
in  its  commission  a  malicious  intent,  the  corporation  must  be 
deemed  by  imputation  to  be  guilty  of  the  wrong,  and  answerable 
for  it,  as  an  individual  would  be  in  such  case." 

The  rules  of  evidence  in  relation  to  the  manner  of  proving  the 
fact  of  intention  are  necessarily  the  same  in  a  criminal  as  in  a 
civil  case,  and  the  same  evidence  which  in  a  civil  case  would  be 
sufficient  to  prove  a  specific  or  malicious  intention  upon  the  part 
of  a  corporation  defendant  would  be  sufficient  to  show  a  like  in- 
tention upon  the  part  of  a  corporation  charged  criminally  with  the 
doing  of  an  act  prohibited  by  the  lav/.     Of  course,  there  are  cer- 
tain crimes  of  which  a  corporation  cannot  be  guilty;  as,   for  in- 
stance, bigamy,  perjury,  rape,  murder,  and  other  offenses,  which 
will   readily  suggest  themselves  to  the  mind.     Crimes  like  these 
just  mentioned  can   only  be  committed   by   natural   persons,   and 
statutes  in  relation  thereto  are  for  this  reason  never  construed  as 
referring  to  corporations;  but  when   a   statute   in  general   terms 
prohibits  the  doing  of  an  act  which  can  be  performed  by  a  cor- 
poration,  and   does   not  expressly   exempt   corporations    from   its 
provisions,  there  is  no  reason  why  such   statute   should  be  con- 
strued as  not  applying  to  them,  when  the  punishment  provided 
for  its  infraction  is  one  that  can  be  inflicted  upon  a  corporation — 
as,  for  instance,  a  fine.     In  the  act  of  congress  now  under  con- 
sideration  it  is  made  an   offense   for  any   contractor   or  subcon- 
tractor whose  duty  it  shall  be  to  employ,  direct,  or  control  any 
laborer  employed   upon  any   of  the  public  works   of  the  United 
States,  to  require  or  permit  such  laborer  to  work  more  than  eight 
hours  in  any  calendar  day.     A  corporation  may  be  a  contractor 
or    subcontractor    in    carrying    on    public    works    of    the    United 
States,  and  as  such  it  has  the  power  or  capacity  to  violate  this 
provision    of    the   law.      Corporations    are,    therefore,    within    the 
letter,  and,  as  it  is  as  much  against  the  policy  of  the  law  for  a 
corporation  to  violate  these  provisions  as  for  a  natural  person  so 
to  do,  they  are  also  within  the  spirit  of  this  statute ;  and  no  reason 


PEOPLE    V.    ROCHESTER    RAILWAY    &    LIGHT    CO.  I9I 

is  perceived  why  a  corporation  which  does  the  prohibited  act 
should  be  exempt  from  the  punishment  prescribed  therefor.  If 
the  law  were  capable  of  the  construction  contended  for  by  the 
defendant,  the  result  would  be  that  a  corporation,  in  contracting 
for  the  doing  of  any  public  work,  would  be  given  a  privilege 
denied  to  a  natural  person.  Such  an  intention  should  not  be  im- 
puted to  congress,  unless  its  language  will  admit  of  no  other  in- 
terpretation. 
Motion  denied. 


PEOPLE  V.  ROCHESTER  RAILWAY   &  LIGHT   CO. 

1909.     195  N.  Y.  102,  88  X.  E.  22. 

Liability  for  Manslaughter. 

HISCOCK.  J. — The  respondent  has  been  indicted  for  the  crime 
of  manslaughter  in  the  second  degree  because,  as  alleged,  it  in- 
stalled certain  apparatus  in  a  residence  in  Rochester  in  such  a 
grossly  improper,  unskillful  and  negligent  manner  that  gases  es- 
caped and  caused  the  death  of  an  inmate. 

The  demurrer  to  the  indictment  has  presented  the  question 
whether  a  corporation  may  be  thus  indicted  for  manslaughter, 
under  section  193  of  the  Penal  Code. 

Before  proceeding  to  the  interpretation  of  this  specific  provision 
we  shall  consider  very  briefly  the  general  question  discussed  by 
the  parties  whether  a  corporation  is  capable  of  committing  in  any 
form  such  a  crime  as  that  of  manslaughter. 

Some  of  the  earlier  writers  on  the  common  law  held  that  a 
corporation  could  not  commit  a  crime.  Blackstone  in  his  Com- 
mentaries, Book  I,  page  476,  stated:  "A  corporation  cannot  com- 
mit treason  or  felony,  or  other  crime,  in  its  corporate  capacity, 
though  its  members  may,  in  their  distinct  individual  capacities." 
And  Lord  Chief  Justice  Holt  (Anonymous,  12  Modern,  559)  is 
said  to  have  held  that  "a  corporation  is  not  indictable,  but  the 
particular  members  of  it  are."  In  modern  times,  however,  the 
courts  and  text  writers  quite  universally  have  reached  an  opposite 
conclusion.  A  corporation  may  be  indicted  either  for  nonfeasance 
or  misfeasance,  the  obvious  and  general  limitations  upon  this  lia- 
bility being  in  the  former  case  that  it  shall  be  capable  of  doing 
the  act  for  non-performance  of  which  it  is  charged,  and  that  in 
the  second  case  the  act  for  the  performance  of  which  it  is  charged 
shall  not  be  one  of  which  performance  is  clearly  and  totally  be- 
yond its  authorized  powers.  (Bishop's  New  Criminal  Law,  §§ 
421,  422.) 

The  instances  in  which  it  has  been  held  that  a  corporation 
might  be  liable  criminally  simph'  because  it  did  or  did  not  perform 
some  act,  and  where  no  element  of  intent  was  supposed  to  be  in- 
volved, are  so  familiar  that  any  extended  reference  to  them  is 
entirely  unnecessary.     The  latest  authority  is  this  state  upholding 


192  LIABILITY  FOR  TORTS  AND  CRIMES. 

such  liability  is  found  in  the  case  of  People  v.  Woodbury  Derma- 
tological  Institute  (192  N.  Y.  455),  where  it  was  held  that  a 
corporation  might  be  punished  criminally  for  disobeying  the  stat- 
ute providing  that  "any  person  not  a  registered  physician  who 
shall  advertise  to  practice  medicine,  shall  be  guilty  of  a  misde- 
meanor." There  was  involved  no  question  of  intent,  but  simply 
disobedience  of  a  statutory  prohibition  against  doing  certain  acts. 

At  time  courts  have  halted  somewhat  at  the  suggestion  that  a 
corporation  could  commit  a  crime  whereof  the  element  of  intent 
was  an  essential  ingredient.  But  this  doctrine,  again  with  certain 
limitations,  may  now  be  regarded  as  established,  and  there  is 
nothing  therein  which  is  either  unjust  or  illogical. 

Of  course,  it  has  been  fully  recognized  that  there  are  many 
crimes  so  involving  personal,  malicious  intent  and  acts  ultra  vires 
that  a  corporation  manifestly  could  not  commit  them.  (Wharton's 
Criminal  Law  [9th  ed.],  §  91;  Morawetz  on  Private  Corporations 
[2d  ed.],  §  732  et  seq.)  But  a  corporation,  generally  speaking, 
is  liable  in  civil  proceedings  for  the  conduct  of  the  agents  through 
whom  it  conducts  its  business  so  long  as  they  act  within  the  scope 
of  their  authority,  real  or  apparent,  and  it  is  but  a  step  further 
in  the  same  direction  to  hold  that  in  many  instances  it  may  be 
charged  criminally  with  the  unlawful  purposes  and  motives  of 
such  agents  while  so  acting  in  its  behalf. 

Only  a  few  citations  need  be  made  of  eminent  authorities  ap- 
proving and  illustrating  this  rule. 

Mr.  Bishop  in  his  New  Criminal  Law,  section  417,  says:  "But 
within  the  sphere  of  its  corporate  capacity,  and  to  an  undefined 
extent  beyond,  wherever  it  assumes  to  act  as  a  corporation  it  has 
the  same  capabilities  of  criminal  intent  and  of  act — in  other  words, 
of  crime — as  an  individual  man  sustaining  to  the  thing  the  like 
relations.  *  *  *  Some  have  stumbled  on  the  seeming  impos- 
sibility of  the  artificial  and  soulless  being,  called  a  corporation, 
having  an  evil  mind  or  criminal  intent.  *  *  *  p,^t  ^\^q  author 
explained  in  another  work  that  since  a  corporation  acts  by  its 
officers  and  agents,  their  purposes,  motives  and  intent  are  just  as 
much  those  of  the  corporation  as  are  the  things  done." 

In  Telegram  Newspaper  Co.  v.  Commonwealth  (172  Mass.  294), 
a  corporation  was  held  liable  for  a  criminal  contempt.  In  the 
course  of  the  opinion  it  was  said :  "It  is  contended  that  a  cor- 
poration cannot  be  guilty  of  a  criminal  contempt,  although  it  may 
be  fined  for  what  is  called  a  civil  contempt.  It  is  said  that  an 
intent  cannot  be  imputed  to  a  corporation  in  criminal  proceedings. 
*  *  *  We  think  that  a  corporation  may  be  liable  criminally  for 
certain  ofifenses  of  which  a  specific  intent  may  be  a  necessary 
element.  There  is  no  more  difficulty  in  imputing  to  a  corporation 
a  specific  intent  in  criminal  proceedings  than  in  civil." 

The  most  recent  authority  upon  this  subject  is  found  in  the 
decision  of  the  Supreme  Court  of  the  United  States  in  the  case 
of    New   York   Central    &    Hudson   River   Railroad    Comoany    v. 


PEOPLE    V.    ROCPIESTER    R^MLWAY    &    LIGHT    CO.  I93 

United  States  (212  U.  S.  481,  492,  494).  In  that  case  the  rail- 
road company  and  one  of  its  officials  had  been  convicted  of  the 
payment  of  rebates  to  a  shipper.  On  the  argument  of  the  appeal 
it  was  urged  that  inasmuch  as  no  authority  was  shown  by  the 
board  of  directors  or  the  stockholders  for  the  criminal  acts  of  the 
agents  of  the  company  in  contracting  for  and  giving  rebates,  such 
acts  should  not  be  lawfully  charged  against  the  corporation,  or 
as  expressed  in  the  opinion,  "that  owing  to  the  nature  and  char- 
acter of  its  organization  and  the  extent  of  its  power  and  author- 
ity, a  corporation  cannot  commit  a  crime  of  the  nature  charged 
in  this  case."  The  court  then  said :  "In  this  case  we  are  to  con- 
sider the  criminal  responsibility  of  a  corporation  for  an  act  done 
while  an  authorized  agent  of  the  company  is  exercising  the  au- 
thority conferred  upon  him.  It  was  admitted  *  *  *  that  at 
the  time  mentioned  in  the  indictment  the  general  freight  traffic 
manager  and  the  assistant  freight  traffic  manager  were  authorized 
to  establish  rates  at  which  freight  should  be  carried.  *  *  * 
Thus  the  subject-matter  of  making  and  fixing  rates  was  within 
the  scope  of  the  authority  and  employment  of  the  agents  of  the 
company,  whose  acts  in  this  connection  are  sought  to  be  charged 
upon  the  company.  Thus  clothed  with  authority,  the  agents  were 
bound  to  respect  the  regulation  of  interstate  commerce  enacted 
by  Congress,  requiring  the  filing  and  publication  of  rates  and 
punishing  departures  therefrom.  Applying  the  principle  governing 
civil  liability,  we  go  only  a  step  farther  in  holding  that  the  act 
of  the  agent,  while  exercising  the  authority  delegated  to  him  to 
make  rates  for  transportation,  may  be  controlled,  in  the  interest 
of  public  policy,  by  imputing  his  act  to  his  employer  and  impos- 
ing penalties  upon  the  corporation  for  which  he  is  acting  in  the 
premises.  It  is  true  that  there  are  some  crimes,  which  in  their 
nature  cannot  be  committed  by  corporations.  But  there  is  a  large 
class  of  offenses,  wherein  the  crime  consists  in  purposely  doing 
the  things  prohibited  by  statute.  In  that  class  of  crimes  we  see 
no  good  reason  why  corporations  may  not  be  held  responsible  for 
and  charged  with  the  knowledge  and  purposes  of  their  agents, 
acting  within  the  authority  conferred  upon  them." 

Within  the  principles  thus  and  elsewhere  declared,  we  have  no 
doubt  that  a  definition  of  certain  forms  of  manslaughter  might 
have  been  formulated  which  would  be  applicable  to  a  corporation, 
and  make  it  criminally  liable  for  various  acts  of  misfeasance  and 
nonfeasance  when  resulting  in  death,  and  amongst  which  very 
probably  might  be  included  conduct  in  substance  similar  to  that 
here  charged  against  the  respondent.  But  this  being  so,  the  ques- 
tion still  confronts  us  whether  corporations  have  been  so  made 
liable  for  the  crime  of  manslaughter  as  now  expressly  defined  in 
the  section  alone  relied  on  by  the  people,  and  this  question  we 
think  must  be  decisively  answered  in  the  negative. 

Section  179  of  the  Penal  Code  defines  homicide  as  "the  killing 
of  one  human  being  by  the  act,  procurement  or  omission  of  an- 

13 — Private  Corp. 


194  LIABILITY  FOR  TORTS  AND   CRIMES. 

Other."  We  think  that  this  final  word  "another"  naturally  and 
clearly  means  a  second  or  additional  member  of  the  same  kind 
of  class  alone  referred  to  by  the  preceding  words,  namely,  another 
human  being,  and  that  we  should  not  interpret  it  as  appellant  asks 
us  to,  as  meaning  another  "person,"  which  might  then  include 
corporations.  It  seems  to  us  that  it  would  be  a  violent  strain 
upon  a  criminal  statute  to  construe  this  word  as  meaning  an 
agency  of  some  kind  other  than  that  already  mentioned  or  re- 
ferred to,  and  as  bridging  over  a  radial  transition  from  human 
beings  to  corporations.  Therefore  we  construe  this  definition  of 
homicide  as  meaning  the  killing  of  one  human  being  by  another 
human  being. 

Section  i8o  says  that  "Homicide  is  either:  i.  Murder;  2. 
Manslaughter,"  etc.  Section  193  says  that:  "Such  homicide," 
that  is,  "the  killing  of  one  human  being  *  *  *  ]3y  another," 
is  manslaughter  in  the  second  degree  when  committed  "without 
a  design  to  effect  death.  *  *  *  3-  By  any  act,  procurement  or 
culpable  negligence  of  any  person,  which  *  *  *  does  not  con- 
stitute the  crime  of  murder  in  the  first  or  second  degree,  nor 
manslaughter  in  the  first  degree."  Thus  we  have  the  underlying 
and  fundamental  definition  of  homicide  as  the  killing  of  one 
human  being  by  another  human  being,  and  out  of  this  basic  act 
thus  defined  and  according  to  the  circumstances  which  accompany 
it  are  established  crimes  of  varying  degree,  including  that  of 
manslaughter,  for  which  the  respondent  has  been  indicted.  In 
the  definition  of  these  crimes  as  contained  in  the  sections  under 
considerations  (§§  183-193),  we  do  not  discover  any  evidence  of 
an  intent  on  the  part  of  the  legislature  to  abandon  the  limitation 
of  its  enactments  to  human  beings  or  to  include  a  corporation  as 
a  criminal.  Many  of  these  sections  could  not  by  any  possibility 
apply  to  a  corporation,  and  in  our  opinion  subdivision  3  of  sec- 
tion 193,  relating  to  manslaughter,  manifestly  does  not.  It  is  true 
that  the  term  "person"  used  therein  may  at  times  include  corpora- 
tions, but  that  is  not  the  case  here.  The  surrounding  and  related 
sections  are  not  calculated  to  induce  the  belief  that  it  has  any  such 
meaning,  and  the  classification  as  a  form  of  homicide  and  the 
definition  of  homicide  already  quoted  forbid  it. 

The  judgment  should  be  affirmed. 

Cullen,  Ch.  J.,  Gray,  Edward  T.  Bartlett,  Werner,  Willard 
Bartlett  and  Chase,  JJ.,  concur. 

Judgment  affirmed. "^ 

*See,  also,  New  York  Central  &c.  R.  Co.  v.  United  States,  212  U.  S. 
481  (rebating).  A  corporation  has  been  held  for  the  crime  of  man- 
slaughter, resulting  from  a  wanton  lack  of  life  preservers  on  its  steam- 
boat.   United  States  v.  Van  Schaick  (1905),  134  Fed.  592.— Ed. 


CHAPTER  IX. 

EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS — STATE    CONTROL 
OVER    FOREIGN    CORPORATIONS. 

MERRICK  V.  VAN   SANTVOORD. 
1866.     34  N.  Y.  208. 

Appeal  from  the  affirmance,  in  the  fifth  judicial  district,  of  a 
judgment  rendered  at  the  Oswego  circuit  against  both  the  defend- 
ants for  $6,846.56. 

The  action  was  for  damages  caused  by  the  negligence  of  the 
proprietors  of  Steamer  Cayuga  in  towing  the  boat  Camden,  by 
which  the  latter  was  sunk  in  the  Hudson  river,  and  the  bulk  of 
the  cargo  lost. 

The  defendant  Brainard  was  one  of  the  proprietors  of  the 
Cayuga,  and  the  Steam  Navigation  Company  was  another.  The 
latter  was  a  Connecticut  corporation,  and  it  was  held  that,  as  the 
business  of  the  corporation  was  wholly  conducted  in  the  State  of 
New  York,  except  the  maintenance  of  its  organization  by  annual 
elections  in  the  State  of  Connecticut,  it  must  be  deemed  to  have 
mitigated  to  New  York,  and  to  have  thereby  forfeited  its  charter ; 
and  the  testator,  Abraham  Van  Santvoord,  who  was  a  member, 
officer  and  agent  of  the  company,  was  personally  liable  for  the 
debts  and  torts  of  the  corporation. 

PORTER,  J. — The  defendant  Van  Santvoord  was  not  a  party 
to  the  contract  with  the  proprietors  of  the  Camden,  and  he  did 
not  navigate  the  steamboat  by  which  that  vessel  was  towed.  He 
neither  owned  nor  chartered  the  Cayuga,  nor  did  he  take  any 
part,  as  agent  or  otherwise,  in  chartering  it.  He  was  held  liable 
on  the  sole  ground  that  he  was  a  stockholder  in  the  Steam  Navi- 
gation Company,  and  that  Mr.  Redfield,  who  was  the  secretary  of 
that  company,  and  who  acted  in  its  behalf,  united  with  other  par- 
ties in  chartering  the  steamer  Cayuga,  for  the  use  of  the  Hudson 
River  Towing  Association.  To  connect  the  defendant  with  the 
liability,  the  court  below  found  it  necessary  to  hold,  in  substance : 
I.  That  there  was  such  a  corporation  as  the  Steam  Navigation 
Company;  to  the  end  that  he  might  be  bound,  as  a  shareholder, 
by  the  corporate  acts  of  its  officers.  2.  That  there  was  no  such 
corporation ;  to  the  end  that  he  might  be  held  responsible  as  a 
partner,  for  debts  contracted,  and  for  torts  committed  by  other 
persons  assuming  to  act  in  its  name. 

Mr  Van  Santvoord  was  a  citizen  of  tliis  State,  and  he  became 
a  stockholder  in  the  company  on  the  faith  of  the  pledge  in   its 

195 


196  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

charter,  from  the  State  of  Connecticut,  that  its  members  should 
be  subject  to  no  individual  liability.  The  corporation  has  exer- 
cised its  franchises  for  more  than  thirty  years,  and  in  that  State 
the  pledge  has  been  hitherto  observed.  No  law  of  New  York  has 
imposed  such  liability  on  the  members  of  foreign  corporations,  as 
a  condition  to  the  exercise  here  of  rights  derived  from  other  gov- 
ernments, and  recognized  by  the  rules  of  general  comity.  The 
charter  of  the  company  is  not  impeached  for  fraud  in  its  origin. 
It  was  granted  to  citizens  of  Connecticut;  the  shares  were  made 
transferable;  and  there  were  no  restrictions  of  residence,  in  re- 
spect either  to  the  members  of  the  company  or  the  officers  they 
might  select  for  its  management,  except  that  they  should  be  stock- 
holders and  citizens  of  the  United  States.  That  charter  has 
neither  been  revoked  by  the  authority  which  granted  it,  nor  an- 
nulled by  judicial  decree.  The  company  has  continued  its  or- 
ganization by  annual  elections  in  the  State  of  Connecticut.  It 
was  under  no  restriction  as  to  the  place  where  its  office  should 
be  kept,  or  as  to  the  waters  on  which  its  business  should  be  con- 
ducted. It  has  exercised  no  powers  but  those  conferred  by  its 
charter,  and  it  is  charged  with  no  violation  of  our  local  statutes. 
It  is  held,  however,  by  the  court  below,  that  Mr.  Van  Santvoord 
was  personally  liable  for  the  debts  of  the  company,  and  for  the 
acts  of  its  officers ;  inasmuch,  as  it  appears,  in  a  suit  in  which 
the  corporation  is  not  a  party,  that  only  a  portion  of  its  officers 
reside  in  Connecticut;  that  it  holds  in  that  State  none  but  its 
annual  meetings  for  the  election  of  directors ;  that  the  business 
in  which  it  is  practically  engaged,  is  the  navigation  of  the  Hudson 
river,  and  that  its  principal  office  is  in  the  city  of  New  York.  The 
judgment  is,  in  effect,  that  the  company  migrated,  and  thereby  for- 
feited its  franchises;  that  this  forfeiture  could  be  collaterally  de- 
clared, in  a  suit  inter  alios  before  the  courts  of  another  State; 
and  that  any  shareholder  can  be  held  personally  liable  on  all  con- 
tracts made  in  the  name  of  the  company  by  its  officers. 

The  liability  of  the  Steam  Navigation  Company  to  the  plaintiffs, 
in  its  corporate  character,  is  a  necessary  result  of  the  facts  found 
at  the  Special  Term;  whether  it  was  or  was  not  guilty  of  the  mis- 
user of  its  franchises  imputed  to  in  the  court  below.  We  have 
had  occasion  to  decide,  in  a  recent  and  leading  case,  that  where 
an  Indiana  and  Michigan  railroad  company,  each  having  authority 
to  construct  and  maintain  a  road  within  the  limits  of  its  own  State, 
united  in  the  business  of  transporting  passengers  on  a  railroad  in 
Illinois,  beyond  the  limits  authorized  in  the  charter  of  either,  both 
companies  are  jointly  liable  for  an  injury  to  an  Illinois  passenger, 
through  the  negligence  of  their  common  employes.  (Bissell  v. 
The  Michigan  Southern  &  Northern  Indiana  R.  R.  Companies,  22 
N.  Y.  258.)  If  the  decision  of  the  Supreme  Court,  in  the  present 
case,  can  be  sustained  as  to  the  defendant  Van  Santvoord,  it  must 
be  upon  the  anomalous  ground  that,  in  the  absence  of  any  con- 
tract or  statute  imposing  personal  liability,  the  same  precise  state 


MERRICK    V.    VAN    SANTVOORD.  197 

of  facts,  which  will  uphold  a  judgment  against  a  foreign  corpora- 
tion, will  support  one  against  either  of  its  shareholders. 

The  only  contract  ever  made  by  Van  Santvoord,  which  has  any 
bearing  on  the  present  issue,  was  that  which  he  made  on  becoming 
a  party  to  the  Connecticut  charter.  That  certainly  did  not  make 
him  a  partner,  either  of  the  defendant  Brainard,  or  of  Mr.  Red- 
field,  the  secretary  of  the  company.  He  gave  no  power  to  either 
to  contract  for  him,  and  no  consent  to  be  responsible  for  their 
tortious  acts.  His  contract  with  the  State  of  Connecticut  was  for 
immunity  from  personal  liability.  The  plaintiffs  insist  that  the 
burden  is  upon  him  to  show  how  he  was  ever  relieved  from  the 
liability  of  a  partner.  This  is  a  precise  inversion  of  the  rule. 
The  onus  is  upon  the  plaintiffs  to  show  that  he  ever  assumed 
any  such  liability ;  or  that  he  became  chargeable  with  it  in  law, 
through  his  own  acts  or  through  those  of  the  company.  No  stat- 
ute of  that  State,  or  of  this,  has  been  violated  either  by  him  or 
by  the  corporation.  The  fact  is  found,  that  his  contract  was  that 
of  a  corporator,  vvith  immunity  from  personal  responsibility.  Even 
if  the  charter  liad  been  silent,  he  would  not  have  been  liable  for 
the  debts  of  the  company,  either  there  or  here,  unless  by  force  of 
some  statute  depriving  him  of  his  exemption.  (Ex  parte  Riper, 
20  Wend.  616;  Seymour  v.  Sturgess,  26  N.  Y.  134.)  The  boats 
of  the  company  were  not  his  boats.  Its  debts  were  not  his  debts. 
In  the  case  of  The  Bank  of  Augusta  v.  Earl,  the  Chief  Justice 
said:  "Whenever  a  corporation  makes  a  contract,  it  is  the  con- 
tract of  the  legal  entity  of  the  artificial  being  created  by  the  char- 
ter, and  not  the  contract  of  the  individual  members."  (13  Peters, 
587.)  In  Connecticut  the  defendant  was  clearly  entitled  to  pro- 
tection. How  does  it  happen  that  on  one  side  of  the  State  line 
he  owns  the  property,  which  on  the  other  belongs  to  the  com- 
pany, or  that  by  crossing  the  New  York  boundary  he  assumes  all 
the  liabilities  of  the  corporation?  It  is  conceded  that  he  was  not 
a  partner  when  the  company  kept  an  office  in  Connecticut.  He 
has  done  nothing  since,  and  nothing  has  been  done  by  the  cor- 
poration, which  changed  in  law  their  mutual  relations.  It  has 
hitherto  supposed  that  the  members,  even  of  a  domestic  corpora- 
tion, could  not  be  charged  with  personal  liability  without  their 
consent,  except  by  the  law  making  power;  but  in  the  present 
case  it  is  claimed  that,  upon  considerations  of  public  policy,  such 
liability  can  be  imposed  by  the  courts  on  the  members  of  a  Con- 
necticut corporation,  against  the  stipulations  of  its  charter,  and 
without  statutory  authority  either  there  or  here. 

No  warrant  for  such  a  proposition  can  be  found  in  our  general 
statutes.  We  exercise  the  right,  which  exists  in  all  sovereignties, 
to  regulate  and  restrain  foreign  corporations  in  doing  business 
here  under  charters  from  other  governments.  We  prohibit  them 
from  the  exercise  of  certain  banking  powers.  (i  R.  S.  712.) 
We  require  from  insurance  companies  appropriate  guaranties  for 
the  security  of  our  own  citizens.     (Laws  of  1851,  ch.  95;  Laws 


198  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

of  1857,  ch.  30,  548.)  We  require  all  foreign  corporations  doing 
business  in  this  State  to  keep  their  transfer  books  and  lists  of 
shareholders  here,  subject  at  all  reasonable  times  to  inspection  by 
parties  in  interest.  (Laws  of  1842,  ch.  197.)  We  require  every 
such  corporation  to  facilitate  proceedings  against  it  in  our  own 
courts,  by  filing,  in  the  office  of  the  secretary  of  State,  a  written 
designation  of  some  resident  in  each  county  where  its  business  is 
conducted,  on  whom  process  may  be  served;  and,  in  the  absence 
of  such  designation,  we  authorize  service  of  process  on  the  com- 
pany, by  delivery  to  any  of  its  resident  agents.  (Laws  of  1855, 
p.  270.)  We  subject  to  attachment  and  sale  on  execution,  at  the 
instance  of  creditors  in  this  State,  the  choses  in  action  held  by 
such  companies  against  our  own  citizens  and  domestic  corpora- 
tions. (Laws  of  1842,  ch.  197.)  These  various  regulations  and 
restrictions  imply  the  validity  of  the  exercise  here,  of  powers 
granted  by  other  governments ;  but  we  have  other  statutes  ex- 
pressly recognizing  the  rights  of  foreign  corporations  as  contract- 
ing parties  and  litigants,  except  so  far  as  they  are  limited  by 
the  tenor  of  their  own  charters,  or  abridged  by  the  force  of  our 
local  laws.  (2  R.  S.  457,  §§  i,  2;  Code,  §  437.)  These  acts  of 
the  law-making  power  operate  as  a  recognition,  not  only  of  the 
legal  existence  of  such  corporations  under  charters  from  other 
States,  but  of  the  rights  and  immunities  conferred  on  the  corpora- 
tors. Except  so  far  as  these  are  cut  down  by  our  own  legislation, 
they  are  perfect  and  absolute,  until  they  are  revoked  or  annulled 
in  the  State  from  which  they  were  derived. 

The  considerations  of  State  policy,  which  controlled  the  deci- 
sion in  the  court  below,  seem  to  us  less  weighty  than  they  would 
appear,  at  first  view,  on  reading  the  opinions  of  the  learned 
judges.  We  think  the  recognition,  in  our  State,  of  the  rights  hith- 
erto conceded  in  our  courts  to  foreign  corporations,  is  neither  in- 
jurious to  our  interests,  repugnant  to  our  policy,  nor  opposed  to 
the  spirit  of  our  legislation.  Ours  is  peculiarly  a  commercial 
country.  We  have  large  inland  lakes,  which  serve  as  State  and  na- 
tional boundaries.  We  have  continental  rivers  which  unite  the 
States  they  seem  to  divide ;  and,  at  their  head  waters,  the  tribu- 
taries of  two  oceans  interlock.  We  have  every  variety  of  climate 
and  production.  Our  agricultural  and  mineral  resources  are  al- 
most boundless.  We  have  great  facilities  for  internal  intercourse, 
and  favorable  openings  on  every  side  in  the  various  departments 
of  human  industry  and  enterprise.  By  common  consent,  all  these 
advantages  have  been  regarded  as  open  to  every  American  citizen ; 
though  many  of  the  inland  States  are  untouched  by  the  great 
natural  highway  of  commerce. 

In  no  other  country  has  so  much  been  achieved,  by  the  asso- 
ciation of  capital  and  labor,  through  corporate  organization.  It 
has  enabled  the  many,  whose  means  were  limited,  to  contribute  to 
the  accomplishment,  and  participate  in  the  benefit  of  great  under- 
takings, which  were  beyond  the  compass  of  individual  resources 


MERRICK    V.    VAN    SANTVOORD.  I99 

and  enterprise.  It  has  taken,  without  let  or  hindrance,  the  direc- 
tion to  which  it  was  invited  by  the  general  law  of  supply  and 
demand.  The  same  enliglitened  policy  has  prevailed  in  every  por- 
tion of  the  country.  All  have  welcomed  labor  from  abroad,  and 
invited  the  free  investment  of  capital.  Hitherto,  corporate  enter- 
prise has  not  been  trammeled  by  unfriendly  legislation.  No  jeal- 
ousy of  competition,  or  rivalry  of  adverse  interest,  has  been  per- 
mitted to  convert  State  lines  into  barriers  of  obstruction  to  the 
free  course  of  general  commerce.  Its  avenues  have  been  open  to 
all. 

In  this  country  our  material  interests  are  so  interwoven  that 
the  union  of  the  States  is  due,  in  its  continuance,  if  not  in  its 
origin,  as  much  to  commercial  as  to  political  necessity.  The  citi- 
zens of  each  claim  a  birthright  in  the  advantages  and  resources 
of  all.  They  demand,  from  their  local  authorities,  such  facilities 
as  the  law-making  power  can  afford,  in  the  employment  of  labor 
and  capital.  They  claim  such  corporate  franchises  and  immunities 
as  may  enable  them  to  compete  on  equal  terms  with  the  citizens 
of  other  States.  For  these,  from  the  structure  of  our  institutions, 
they  naturally  look  to  their  own  government.  They  acknowledge 
a  double  allegiance  in  their  local  and  federal  relations,  which,  by 
general  consent,  carries  with  it  a  correlative  community  of  rights. 
They  may  live  in  an  inland  State,  but  they  are  none  the  less  citi- 
zens of  a  maritime  nation;  and  they  may  lawfully  organize  com- 
panies at  home  for  trafific  on  ocean  highways. 

A  corporate  charter  is  in  the  nature  of  a  commission  from  the 
State  to  its  citizens,  and  their  successors  in  interest,  whether  at 
home  or  abroad.  Each  government,  in  the  exercise  of  its  own 
discretion,  determines  the  conditions  of  its  grant.  It  is  free  to 
impose  or  omit  territorial  restrictions.  It  can  not  enlarge  its  own 
jurisdiction,  but  it  can  confer  general  powers,  to  be  exercised 
within  its  bounds,  or  beyond  them,  wherever  the  comity  of  nations 
is  respected.  For  the  purposes  of  commerce,  such  a  commission 
is  regarded,  like  a  government  flag,  as  a  symbol  of  allegiance  and 
authority ;  and  it  is  entitled  to  recognition  abroad  until  it  forfeits 
recognition  at  home. 

Under  such  commissions.  New  York  has  sent  forth  its  citizens 
from  time  to  time  with  corporate  franchises  and  immunities,  to 
gather  wealth  from  the  coal  mines  of  Pennsylvania,  the  silver 
mines  of  Mexico,  and  the  gold  mines  of  California;  to  establish 
lines  of  inland  navigation  on  the  Orinoco  and  the  Amazon ;  to 
plant  forest  trees  beyond  the  IMississippi ;  to  fish  in  the  northern 
and  southern  oceans ;  to  found  Christian  missions  in  Asia,  and  to 
colonize  freedmen  on  the  coast  of  Africa.  In  many  of  these  cases 
the  franchises  were,  by  the  terms  of  the  charter,  to  be  exercised 
in  foreign  territory.  In  1826,  for  instance.  Churchill  C.  Cambrel- 
ing  and  others  were,  by  a  law  of  New  York,  constituted  a  body 
corporatem  under  the  title  of  "The  United  States  Mexican  Com- 
pany,"   organized    "for   the    purpose    of    purchasing,    leasing    and 


200  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS^    ETC. 

working  gold  and  silver  mines  in  Mexico  and  South  America." 
(Laws  of  1826,  143.)  In  the  act  of  1827,  incorporating  "The 
New  York  South  American  Steamboat  Association,"  it  was  pro- 
vided that  the  annual  elections  should  be  held  in  the  city  of  New 
York,  but  there  was  no  requirement  that  any  of  the  officers  should 
be  residents;  and  the  company  was  authorized,  in  terms,  to  navi- 
gate its  vessels  "upon  any  water  or  waters  not  within  the  juris- 
diction of  New  York."  (Laws  of  1827,  308.)  The  Panama  Rail- 
road Company  was  organized,  under  a  charter  from  this  State,  to 
construct  and  maintain  a  railway  "across  the  Isthmus  of  Panama, 
in  the  republic  of  New  Grenada."  The  only  act  which  tlie  charter 
requires  to  be  done  in  this  State,  is  the  annual  election  of  its 
officers;  and,  on  the  theory  maintained  by  the  respondents,  every 
shareholder  in  that  company,  wherever  found,  is  individually  liable 
for  all  the  wrongs  it  commits,  and  all  the  debts  it  contracts. 
(Laws  of  1849,  407.)  Other  illustrations  of  our  legislative  con- 
struction of  the  rules  of  national  comity,  will  be  found  in  the  acts 
incorporating  the  "North  Carolina  Gold  Mining  Company,"  the 
"Orinoco  Steam  Navigation  Company,"  the  "Pacific  Mail  Steam- 
ship Company,"  the  "California  Inland  Steam  Navigation  Com- 
pany," the  "African  Civilization  Society,"  and  the  "American  For- 
est Tree  Propagation  and  Land  Company."  (Laws  of  1828,  211; 
id.  1847,  513;  id.  1848,  396;  id.  1850,  627;  id.  1864,  758;  id.  1865, 
360.) 

The  mutable  nature  of  the  tenure,  in  this  State,  of  property 
invested  in  foreign  corporations,  would  be  strikingly  illustrated  if 
the  present  judgment  should  be  upheld,  by  the  judicial  experience 
of  the  Steam  Navigation  Company,  which  has  hitherto  been  held 
by  our  courts  to  its  just  responsibilities,  and  protected  in  the  ex- 
ercise of  its  corporate  rights.  (Miller  v.  Steam  Navigation  Com- 
pany, 6  Seld.  431;  Wells  v.  Same,  4  id.  375;  2  Const.  204;  Steam 
Navigation  Company  v.  Weed,  17  Barb.  378.) 

We  think  the  policy  of  this  State  is  in  harmony  with  that  of 
the  country,  and  that  it  would  be  neither  provident  nor  just  to 
inaugurate  a  rule  which  would  unsettle  the  security  of  corporate 
property  and  rights,  and  exclude  others  from  the  enjoyment  here 
of  privileges  which  have  always  been  accorded  to  us  abroad.  Our 
national  commerce  is  but  the  aggregate  of  that  of  the  States,  and 
every  needless  restriction,  by  the  operation  of  local  laws,  is  un- 
just and  calamitous  to  all.  We  suppose  the  rules  of  comity,  on 
which  we  have  heretofore  acted,  to  be  generally  accepted  and 
approved.  We  see  no  reason  why  a  southern  State  may  not  grant, 
to  a  corporation  of  its  planters,  the  right  to  erect  mills  for  the 
manufacture  of  their  cotton  in  New  England;  nor  why  the  leg- 
islature of  Massachusetts  may  not  authorize  a  company  of  Lowell 
millers  to  raise  cotton  in  South  America,  or  on  the  Sea  Islands. 
The  State  of  Illinois  touches  neither  the  Atlantic  nor  the  Pacific; 
but  if  it  should  organize  a  company  of  its  citizens  to  transport 
produce  on  the  ocean,  with  its  office  in  the  city  of  New  York,  and 


MERRICK   V.    VAN    SANTVOORD.  201 

its  business  conducted  by  managers,  elected  annually  in  Chicago, 
the  rights  of  the  corporation  would  be  recognized  wherever  the 
obligations  of  national  law  are  respected. 

The  rules  of  comity  are  subject  to  local  modification  by  the  law 
making  power;  but,  until  so  modified,  they  have  the  controlling 
force  of  legal  obligation.  The  franchises  and  immunities  which 
they  secure,  it  is  the  duty  of  the  courts  to  respect,  until  the  sov- 
ereign sees  fit  to  deny  them.  The  rights  of  a  foreign  suitor  or 
defendant,  so  far  as  they  are  unabridged  by  legislation,  are  as 
imperative  and  absolute  as  those  of  the  citizen.  These  rules  have 
their  place  in  every  system  of  jurisprudence.  As  there  are  certain 
conservative  powers  not  derived  from  grant,  but  inherent  in  every 
government  because  essential  to  its  existence,  so  there  are  certain 
obligations,  springing  from  the  necessities  of  national  intercourse, 
and  recognized  by  all  civilized  communities  in  the  law  of  general 
comity.  They  have  been  uniformly  acknowledged  and  enforced 
by  the  courts  of  this  State.  (Bard  v.  Poole,  2  Kern.  495;  Mutual 
Benefit  Life  Insurance  Co.  v.  Davis,  id.  569;  Mumford  v.  Amer- 
ican Life  Insurance  &  Trust  Co.  v.  Townsend,  24  Barb.  658;  New 
York  Floating  Derrick  Co.  v.  New  Jersey  Oil  Co.,  3  Duer,  648 ; 
Morris  Canal  and  Banking  Company  v.  Townsend,  24  Barb.  658 ; 
American  Life  Insurance  Co.  v.  Townsend,  11  Paige,  635;  Steam 
Navigation  Co.  v.  Weed,  17  Barb.  378;  New  Haven  Railroad  Co. 
V.  Schuyler,  17  N.  Y.  592;  33  id.)  Their  authority  is  fortified  by 
repeated  adjudications  in  our  federal  tribunals.  (The  King  of 
Spain  V.  Oliver,  i  Pet.  C.  C.  276;  Society  for  Propagating  the 
Gospel  in  Foreign  Parts  v.  Town  of  Pawlet,  4  Pet.  480;  Bank  of 
Augusta  V.  Earle,  13  id.  519;  Runyan  v.  Costar,  14  id.  122;  Tom- 
bigbee  Railroad  Co.  v.  Kneeland,  4  How.  16.) 

The  rights  of  foreign  corporations  have  been  protected  in  the 
English  courts  on  the  same  general  principle  of  public  law.  (The 
Nabob  of  Carnatic  v.  The  East  India  Co.,  i  Vesey,  371 ;  The 
Dutch  West  India  Co.  v.  Henriquez,  i  Strange,  612;  The  King 
of  Spain  v.  Mullett.  2  Bligh's  N.  S.  3.)  We  had  the  benefit  of 
the  rule  in  the  suit  instituted  in  Great  Britain,  in  the  case  of  the 
United  States  against  Smithson's  Executors.  Indeed,  the  law  of 
international  comity  in  the  interest  of  commerce,  which  has  so 
long  prevailed  in  that  country,  is  recognized  in  a  provision  of 
Magna.  Charta;  which  elicited  from  Montesquieu  the  encomium, 
that  the  English  have  made  the  protection  of  foreign  merchants 
one  of  the  articles  of  their  own  liberty. 

The  theory  on  which  the  Supreme  Court  held  the  defendant 
Van  Santvoord  liable  was,  that  he  was  a  member  of  an  abscond- 
ing corporation ;  that  it  had  migrated  from  Connecticut  to  New 
York;  and  that,  by  such  migration,  it  had  lost  its  corporate  char- 
acter, except  for  the  single  purpose  of  charging  its  shareholders 
with  personal  liability,  on  the  contracts  made  here  by  its  officers. 
In  these  views  we  cannot  concur. 

A  corporation  is  an  artificial  being,  and  has  no  dwelling  either 


202  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

in  its  office,  its  warehouses,  its  depots  or  its  ships.  Its  domicile 
is  the  legal  jurisdiction  of  its  origin,  irrespective  of  the  residence 
of  its  officers  or  the  place  where  its  business  is  transacted.  It 
retains  that  domicile  until  it  ceases  to  exist;  and  its  existence  con- 
tinues, within  the  limits  assigned  for  its  duration,  so  long  as  it 
complies  with  the  requirements  of  its  charter,  and  with  the  condi- 
tions imposed  by  State  laws,  maintains  its  corporate  succession 
by  elections  in  the  proper  jurisdiction,  and  continues  to  exercise 
its  franchises  under  a  grant  which  has  neither  been  impeached 
nor  revoked. 

To  support  the  theory  of  migration  and  forfeiture,  the  respon- 
dents rely  mainly  upon  a  passing  dictum  of  Chief  Justice  Taney, 
in  the  case  of  the  Bank  of  Augusta  v.  Earle,  transcribed  by  Judge 
Thompson  in  haec  verba,  in  the  subsequent  case  of  Runyan 
V.  Foster  (13  Pet.  588;  14  id.  129).  We  think  the  effect  of  this 
dictum  has  been  misapprehended,  and  that  the  true  import  of  the 
observation  of  the  Chief  Justice  is,  not  that  a  corporation  is  capa- 
ble of  migration,  and  of  thereby  forfeiting  its  rights,  but  that  in 
its  nature,  as  an  artificial  creation  of  law,  it  is  utterly  incapable 
of  migration,  and  must  be  deemed  to  retain  its  domicile  in  the 
jurisdiction  from  which  its  being  is  derived.  "It  is  very  true," 
he  said,  "that  a  corporation  can  have  no  legal  existence  out  of  the 
boundaries  of  the  sovereignty  by  which  it  was  created,  It  exists 
only  in  contemplation  of  law,  and  by  force  of  law,  and  when  that 
law  ceases  to  operate,  and  is  no  longer  obligatory,  the  corporation 
can  have  no  existence;  it  must  dwell  in  the  place  of  its  creation, 
and  cannot  emigrate  to  another  sovereignty." 

It  was  a  suggestion  in  answer  to  the  argument  that,  inasmuch 
as  the  corporation  could  not  migrate,  it  could  neither  contract  nor 
sue,  except  in  the  State  of  its  domicile.  He  admitted  its  inca- 
pacity to  migrate,  but  held  that  it  did  not  follow  that  its  existence 
there  would  not  be  recognized  elsewhere.  It  was  accordingly  ad- 
judged, in  that  case,  that  contracts  made  in  the  city  of  Mobile, 
between  citizens  of  Alabama  and  a  Georgia  bank,  a  Pennsylvania 
bank  and  a  Louisiana  railroad  company,  respectively,  could  be 
enforced  under  the  general  law  of  comity  as  contracts  within  the 
scope  of  their  respective  charters,  though  unauthorized  by  the 
State  of  Alabama.  The  Chief  Justice  expressed  the  opinion  that 
no  valid  reason  can  be  assigned  for  refusing  to  give  effect  to  the 
contracts  of  foreign  corporations,  "when  they  are  not  contrary  to 
the  known  policy  of  the  State,  or  injurious  to  its  interests.  It  is 
nothing  more  than  the  admission  of  the  existence  of  an  artificial 
person,  created  by  the  laws  of  another  State,  and  clothed  with 
the  power  of  making  certain  contracts.  It  is  but  the  usual  comity 
of  recognizing  the  law  of  another  State."  (13  Pet.  519,  598-590.) 
The  concession  referred  to  was  reiterated  in  the  same  sense  by 
Judge  Thompson,  and  in  answer  to  a  similar  argument  in  the  case 
of  Runyan  v.  Costar,  in  which  it  was  adjudged  that  a  coal  com- 
pany organized  in  New  York,  for  the  purpose  of  mining  coal  in 


MERRICK   V.    VAN    SANTVOORD.  203 

Pennsylvania,  could  exercise  its  franchise  by  purchasing  and  hold- 
ing lands  in  the  latter  State;  and  though,  by  a  statute  of  Pennsyl- 
vania, lands  so  acquired  were  subject  to  forfeiture,  the  title  of 
the  company  was  good  so  long  as  the  forfeiture  was  not  enforced 
by  the  State.     (14  Pet.  122,  129.) 

The  plaintiffs  also  rely  on  an  incidental  observation  of  Judge 
Denio,  in  the  case  of  Bard  v.  Poole,  "that  it  would  be  a  violation 
of  our  sovereignty  for  a  foreign  corporation  to  remove  from  the 
country  or  State  where  it  was  created  to  locate  wholly  in  this 
State."  (2  Kern.  507.)  The  language  was  perhaps  less  guarded 
and  precise  than  that  of  Chief  Justice  Taney,  as  it  was  a  mere 
passing  disclaimer  in  stating  the  general  grounds  of  the  judgment; 
but  it  doubtless  had  reference  to  the  incapacity  of  a  mere  creature 
of  local  law  to  migrate  to  another  jurisdiction,  and,  by  its  own 
mere  act,  to  acquire  there  the  rights  of  a  domestic  corporation. 
But  the  dictum  of  the  learned  judge,  if  accepted  in  a  broader 
sense,  would  have  no  application  to  the  present  case;  where  the 
corporation,  from  year  to  year,  continued  the  succession  of  those 
charged  with  its  management,  by  elections  held  in  Connecticut, 
this  being  the  only  particular  in  which  it  was  required,  even  by 
implication  from  the  terms  of  the  charter,  to  exercise  any  of  its 
franchises  within  the  limits  of  that  State. 

It  is  true,  as  the  chancellor  of  New  Jersey  held,  in  the  case  of 
Hill  V.  Beach,  that  when  parties  in  one  State  engage  in  a  joint 
enterprise  and  adopt  a  partnership  name,  they  can  not  evade 
personal  liability  by  incorporating  themselves  in  a  similar  name, 
under  the  general  statute  of  another  State;  but  the  ground  of  the 
decision  was,  not  that  the  corporation  migrated  to  New  Jersey,  but 
that  it  never  existed  in  New  York,  where  its  inception  was  utterly 
void,  as  a  flagrant  fraud  upon  the  law. 

In  this  case  we  think  the  Supreme  Court  erred  in  assuming,  that 
the  exercise  by  the  corporation  in  another  State,  through  officers 
and  agents  residing  there,  of  the  powers  with  which  it  was  en- 
dowed at  home,  was  an  act  of  corporate  migration,  even  if  it  was 
capable  of  such  migration.     "It  is  true."  as  the  court  said  in  the 
case  of  Wright  v.  Bundy,  "that  corporations  cannot  migrate  from 
one  sovereignty  into  another,  so  as  to  become  legal  local  existences 
within  the  latter  sovereignty ;  but  it  is  also  true  that  the  migra- 
tion of  the  directors  of  a  corporation  from  one  sovereignty  into 
another,    does   not    terminate    the    existence    of    such    corporation 
within   the   sovereignty   which   created   it."      (ii    Ind.   404.)      Its 
domicile  was  not  controlled  by  the  place  where  its  office  was  kept, 
where  its  books  and  papers  were  deposited,  or  where  its  business 
was  done.     Its  powers  had  no  territorial  limitation;  and   it   fully 
complied  with   the   local   requirements   in   its   charter,   which   were 
limited  to  its  original  organization,  and  the  annual  election  of  its 
managers.     The  grant  of  franchises  without  restriction  is  equiva- 
lent to  a  specific  authority,  to  exercise  them  wherever  the  com- 
pany  might   find   it   convenient   or   profitable,   whether   within   or 


204  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

without  the  Hmits  of  the  State  of  Connecticut.     (Bank  of  Augusta 
V.  Earle,  13  Pet.  588;  per  Taney,  Ch.  J.) 

The  decisions  of  the  other  States,  the  course  of  New  York  leg- 
islation, and  the  general  usages  of  the  country,  are  all  opposed^  to 
the  theory  on  which  this  case  was  decided.  From  the  centralizing 
tendencies  of  commerce,  the  transferable  character  of  corporate 
stock,  and  the  necessities  of  domestic  and  foreign  intercourse,  the 
principal  offices  of  many  of  our  most  important  corporations  in 
the  inland  States  are  kept  in  our  seaboard  city.  It  would  be 
equally  disastrous  to  the  citizens  of  our  own  and  of  other  States, 
if  judicial  innovations  were  permitted  in  applying  the  rules  of  gen- 
eral comity.  Kindred  questions  have  arisen  in  New  England,  and 
there,  as  here,  the  decisions  of  the  courts  have  been  uniform.  The 
fact  that  the  books  and  records  of  a  Florida  corporation  were  kept 
in  the  State  of  Massachusetts,  and  that  its  president  and  other 
officers  resided  there,  was  held  not  to  divest  it  of  its  character  as 
a  foreign  corporation,  nor  to  deprive  its  trustees  of  immunity 
from  prosecution  for  its  debts.  (Danforth  v.  Penny  and  Trus- 
tees, 3  Mete.  564.)  In  a  subsequent  case,  a  Rhode  Island_  com- 
pany, having  purchased  lands  in  Massachusetts,  by  authority  of 
the  legislature,  claimed  to  be,  in  respect  to  such  property,  a  do- 
mestic corporation,  and  entitled  to  the  benefit  of  the  provisions 
regulating  the  taxation  of  those  institutions;  but  the  claim  was 
not  sustained.  The  court  held  that  its  character^  must  be  deter- 
mined by  the  source  of  its  corporate  authority.  Chief  Justice  Shaw 
said:  "Its  existence,  its  franchises,  powers,  capacities,  duties  and 
liabilities,  are  created,  fixed,  limited  and  quahfied,  both  in  action 
and  time,  by  the  law  of  the   State  granting  the   charter."      (13 

Gray,  489.) 

It  is  equally  clear  that  a  corporate  franchise  granted  by  one 
State,  cannot  be  revoked  or  annulled  by  the  courts  of  another,  and 
especially  in  a  proceeding  in  which  the  corporation  is  not  a  party. 
In  the  case  of  the  Silver  Lake  Bank  v.  North,  it  was  held,  by 
Chancellor  Kent,  that  the  courts  of  this  State  would  not  determine, 
in  a  collateral  way,  a  question  of  misuser  by  a  foreign  corporation ; 
and  that  it  was  for  the  State  of  Pennsylvania,  which  granted  the 
plaintiff's  charter,  to  revoke  or  annul  it  in  case  of  forfeiture.  (4 
Johns.  Ch.  373.)  So,  in  the  present  case,  until  the  State  of  Con- 
necticut recalls  its  grant  to  the  Steam  Navigation  Company,  or 
until  the  corporation  is  dissolved  by  judicial  decree,  its  continuing 
organization  is  presumptive  evidence  of  continuing  authority. 
(Barclay  v.  Tallman,  4  Edwards,  123;  Farmers'  Bank  of  Dela- 
ware V.  Beaston,  7  Gill.  &  Johns.  422;  Murray  v.  Vanderbilt,  };] 
Barb.  147;  Bissell  v.  Michigan  Southern  &  Northern  Indiana  Rail- 
road Company,  22  N.  Y.  268.) 

We  have  examined  the  questions  raised  by  the  appeal,  which 
affect  the  defendant  Brainard,  and  think  the  judgment  as  to  him 
should  stand,  for  the  reasons  assigned  in  the  court  below. 

The  judgment  should,  therefore,  be  affirmed  with  costs,  as  to 


PAUL    V.    STATE   OF    VIRGINIA.  20$ 

the  defendant  Brainard,  and  as  to  the  defendant  Van  Santvoord, 
it  should  be  reversed  and  a  new  trial  ordered,  with  costs  to  abide 
the  event.^ 


PAUL  V.  STATE  OF  VIRGINIA. 
1868.     8  Wallace   (U.  S.),  i68,  19  L.  ed.  357. 

Error  to  the  Supreme  Court  of  Appeals  of  the  State  of  Vir- 
ginia.    The  case  was  thus : 

An  act  of  the  legislature  of  Virginia,  passed  on  the  3d  of  Feb- 
ruary, 1866,  provided  that  no  insurance  company,  not  incorporated 
under  the  laws  of  the  State,  should  carry  on  its  business  within 
the  State  without  previously  obtaining  a  license  for  that  purpose; 
and  that  it  should  not  receive  such  license  until  it  had  deposited 
with  the  treasurer  of  the  State  bonds  of  a  specified  character,  to 
an  amount  varying  from  thirty  to  fifty  thousand  dollars,  accord- 
ing to  the  extent  of  the  capital  employed.  The  bonds  to  be  de- 
posited were  to  consist  of  six  per  cent,  bonds  of  the  State,  or 
bonds  of  individuals,  residents  of  the  State,  executed  for  money 
lent  or  debts  contracted  after  the  passage  of  the  act,  bearing  not 
less  than  six  per  cent,  per  annum  interest. 

A  subsequent  act  passed  during  the  same  month  declared  that 
no  person  should,  "without  a  license  authorized  by  law,  act  as 
agent  for  any  foreign  insurance  company,"  under  a  penalty  of  not 
less  than  $50  nor  exceeding  $500  for  each  offence;  and  that  every 
person  offering  to  issue,  or  making  any  contract  or  policy  of  in- 
surance for  any  company  created  or  incorporated  elsewhere  than 
in  the  State,  should  be  regarded  as  an  agent  of  a  foreign  insur- 
ance company. 

In  Alay,  1866,  Samuel  Paul,  a  resident  of  the  State  of  Vir- 
ginia, was  appointed  the  agent  of  several  insurance  companies,  in- 
corporated in  the  State  of  New  York,  to  carry  on  the  general 
business  of  insurance  against  fire;  and  in  pursuance  of  the  law 
of  Virginia,  he  filed  with  the  auditor  of  public  accounts  of  the 
State  his  authority  from  the  companies  to  act  as  their  agent.  He 
then  applied  to  the  proper  officer  of  the  district  for  a  license  to 
act  as  such  agent  within  the  State,  offering  at  the  time  to  comply 
with  all  the  requirements  of  the  statute  respecting  foreign  insur- 
ance companies,  including  a  tender  of  the  license  tax,  excepting 
the  provisions  requiring  a  deposit  of  bonds  with  the  treasurer  of 
the  State,  and  the  production  to  the  officer  of  the  treasurer's  re- 
ceipt. With  these  provisions  neither  he  nor  the  companies  rej^re- 
sented  by  him  complied,  and  on  that  ground  alone  the  license  was 
refused.     Notwithstanding  this  refusal  he  undertook  to  act  in  the 

'See,  also,  Demarest  v.  Flack  (1891),  128  N.  Y.  205,  28  N.  E.  645,  13  L 
R.  A.  854.— Ed. 


2o6  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

State  as  agent  for  the  New  York  companies  without  any  license, 
and  offered  to  issue  poHcies  of  insurance  in  their  behalf,  and  in 
one  instance  did  issue  a  policy  in  their  name  to_  a  citizen  of  Vir- 
ginia. For  this  violation  of  the  statute  he  was  indicted,  and  con- 
victed in  the  Circuit  Court  of  the  city  of  Petersburg,  and  was 
sentenced  to  pay  a  fine  of  fifty  dollars.  On  error  to  the  Supreme 
Court  of  Appeals  of  the  State,  this  judgment  was  affirmed,  and 
the  case  was  brought  to  this  court  under  the  25th  section  of  the 
Judiciary  Act,  the  ground  of  the  writ  of  error  being  that  the  judg- 
ment below  was  against  a  right  set  up  under  that  clause  of  the 
Constitution  of  the  United  States,^  which  provides  that  "the  citi- 
zens of  each  State  shall  be  entitled  to  all  the  privileges  and  im- 
munities of  citizens  in  the  several  States ;"  and  that  clause^  giv- 
ing to  Congress  power  "to  regulate  commerce  with  foreign  nations, 
and  among  the  several   States." 

The  corporators  of  the  several  insurance  companies  were  at  the 
time,  and  still  are,  citizens  of  New  York,  or  of  some  one  of  the 
States  of  the  Union  other  than  Virginia.  And  the  business  of  in- 
surance was  then,  and  still  is,  a  lawful  business  in  Virginia,  and 
might  then,  and  still  may,  be  carried  on  by  all  resident  citizens  of 
the  State,  and  by  insurance  companies  incorporated  by  the  State, 
without  a  deposit  of  bonds,  or  a  deposit  of  any  kind  with  any 
officer  of  the  commonwealth. 

MR.  JUSTICE  FIELD,  after  stating  the  case,  delivered  the 
opinion  of  the  court,  as   follows : 

On  the  trial  in  the  court  below  the  validity  of  the  discriminating 
provisions  of  the  statute  of  Virginia  between  her  own  corporations 
and  corporations  of  other  States  was  assailed.  It  was  contended 
that  the  statute  in  this  particular  was  in  conflict  with  that  clause 
of  the  Constitution  which  declares  that  "the  citizens  of  each  State 
shall  be  entitled  to  all  the  privileges  and  immunities  of  citizens 
in  the  several  States,"  and  the  clause  which  declares  that  Congress 
shall  have  power  "to  regulate  commerce  with  foreign  nations  and 
among  the  several  States,"  the  same  grounds  are  urged  in  this 
court  for  the  reversal  of  the  judgment. 

The  answer  which  readily  occurs  to  the  objection  founded  upon 
the  first  clause  consists  in  the  fact  that  corporations  are  not  citi- 
zens within  its  meaning.  The  term  citizens  as  there  used  applies 
only  to  natural  persons,  members  of  the  body  politic,  owing  alle- 
giance to  the  State,  not  to  artificial  persons  created  by  the  legis- 
lature, and  possessing  only  the  attributes  which  the  legislature  has 
prescribed.  It  is  true  that  it  has  been  held  that  where  contracts 
or  rights  of  property  are  to  be  enforced  by  or  against  corpora- 
tions, the  courts  of  the  United  States  will,  for  the  purpose  of 
maintaining  jurisdiction,  consider  the  corporation  as  representing 
citizens  of  the  State  under  the  laws  of  which  it  is  created,  and  to 

'Art.  IV,  §2. 
'Art.  I,  §8. 


PAUL   V.    STATE    OF    VIRGINIA.  20/ 

this  extent  will  treat  a  corporation  as  a  citizen  within  the  clause 
of  the  Constitution  extending  the  judicial  power  of  the  United 
States  to  controversies  between  citizens  of  different  States.  In 
the  early  cases  when  this  question  of  the  right  of  corporations  to 
litigate  in  the  courts  of  the  United  States  was  considered,  it  was 
held  that  the  right  depended  upon  the  citizenship  of  the  mem- 
bers of  the  corporation,  and  its  proper  averment  in  the  pleadings. 
Thus,  in  the  case  of  The  Hope  Insurance  Company  v.  Boardman,^ 
where  the  company  was  described  in  the  declaration  as  "a  com- 
pany legally  incorporated  by  the  legislature  of  the  State  of  Rhode 
Island  and  Providence  Plantations,  and  established  at  Providence," 
the  judgment  was  reversed  because  there  was  no  averment  that 
the  members  of  the  corporation  were  citizens  of  Rhode  Island,  the 
court  holding  that  an  aggregate  corporation  as  such  was  not  a 
citizen  within  the  meaning  of  the  Constitution. 

In  later  cases  this  ruling  was  modified,  and  it  was  held  that  the 
members  of  a  corporation  would  be  presumed  to  be  citizens  of  the 
State  in  which  the  corporation  was  created,  and  where  alone  it 
had  any  legal  existence,  without  any  special  averment  of  the  place 
of  creation  and  business  of  the  corporation  being  sufficient ;  and 
that  such  presumption  could  not  be  controverted  for  the  purpose 
of  defeating  the  jurisdiction  of  the  court.* 

But  in  no  case  which  has  come  under  our  observation,  either  in 
the  State  or  Federal  courts,  has  a  corporation  been  considered  a 
citizen  within  the  meaning  of  that  provision  of  the  Constitution, 
which  declares  that  the  citizens  of  each  State  shall  be  entitled  to 
all  the  privileges  and  immunities  of  citizens  of  the  several  States. 
In  Bank  of  Augusta  v.  Earle,^  the  question  arose  whether  a  bank, 
incorporated  by  the  laws  of  Georgia,  with  a  power,  among  other 
things,  to  purchase  bills  of  exchange,  could  lawfully  exercise  that 
power  in  the  State  of  Alabama;  and  it  was  contended,  as  in  the 
case  at  bar,  that  a  corporation,  composed  of  citizens  of  other 
States,  was  entitled  to  the  benefit  of  that  provision,  and  that  the 
court  should  look  beyond  the  act  of  incorporation  and  see  who 
were  its  members,  for  the  purpose  of  affording  them  its  protec- 
tion, if  found  to  be  citizens  of  other  States,  reference  being  made 
to  an  early  decision  upon  the  right  of  corporations  to  litigate  in 
the  Federal  courts  in  support  of  the  position.  But  the  court,  after 
expressing  approval  of  the  decision  referred  to,*^  observed  that 
the  decision  was  confined  in  express  terms  to  a  question  of  juris- 
diction ;  that  the  principle  had  never  been  carried  further,  and  that 
it  had  never  been  supposed  to  extend  to  contracts  made  by  a 
corporation,    especially   in   another    sovereignty    from   that    of    its 

'  5  Cranch  57. 

*  Louisville  Railroad  Co.  v.  Letson,  2  Howard  497;  Marshall  v.  Balti- 
more &  Ohio  Railroad  Co.,  16  id.  314;  Covington  Drawbridge  Co.  v. 
Shephard.  20  id.  233;  and  Ohio  and  Mississippi  Railroad  Co.  v.  Wheeler, 
1  Black.  297. 

*  13  Peters  536. 

*  Bank  of  the  United  States  v.  Deveaux,  5  Cranch  61. 


208  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC, 

creation;  that  if  the  principle  were  held  to  embrace  contracts,  and 
the  members  of  a  corporation  were  to  be  regarded  as  individuals 
carrying  on  business  in  the  corporate  name,  and  therefore  entitled 
to  the  privileges  of  citizens,  they  must  at  the  same  time  take  upon 
themselves  the  liabilities  of  citizens,  and  be  bound  by  their  con- 
tracts in  like  manner;  that  the  result  would  be  to  make  the  cor- 
poration a  mere  partnership  in  business  with  the  individual  lia- 
bility of  each  stockholder  for  all  the  debts  of  the  corporation ;  that 
the  clause  of  the  Constitution  could  never  have  intended  to  give 
citizens  of  each  State  the  privileges  of  citizens  of  the_  several 
States,  and  at  the  same  time  to  exempt  them  from  the  liabilities 
attendant  upon  the  exercise  of  such  privileges  in  those  States,  that 
this  would  be  to  give  the  citizens  of  other  States  higher  and 
greater  privileges  than  are  enjoyed  by  citizens  of  the  State  itself, 
and  would  deprive  each  State  of  all  control  over  the  extent  of 
corporate  franchises  proper  to  be  granted  therein.  "It  is  impos- 
sible," continued  the  court,  "upon  any  sound  principle,  to  give  a 
construction  to  the  article  in  question.  Whenever  a  corporation 
makes  a  contract  it  is  the  contract  of  the  legal  entity,  the  artificial 
being  created,  and  not  the  contract  of  the  individual  members. 
The  only  rights  it  can  claim  are  the  rights  which  are  given  to  it 
in  that  character,  and  not  the  rights  which  belong  to  its  members 
as  citizens  of  a  State." 

It  was  undoubtedly  the  object  of  the  clause  in  question  to  place 
the  citizens  of  each  State  upon  the  same  footing  with  citizens  of 
other  States,  so  far  as  the  advantages^  resulting  from  citizenship 
in  those  States  are  concerned.  It  relieves  them  from  the  disa- 
bilities of  alienage  in  other  States;  it  inhibits  discriminating  leg- 
islation against  them  by  other  States;  it  gives  them  the  right  of 
free  ingress  into  other  States,  and  egress  from  them;  it  insured 
to  them  in  other  States  the  same  freedom  possessed  by  the  citi- 
zens of  those  States  in  the  acquisition  and  enjoyment  of  property 
and  in  the  pursuit  of  happiness ;  and  it  secures  to  them  in  other 
States  the  equal  protection  of  their  laws.  It  has  been  justly  said 
that  no  provision  in  the  Constitution  has  tended  so  strongly  to 
constitute  the  citizens  of  the  United  States  one  people  as  this.^ 

Indeed,  without  some  provision  of  the  kind  removing  from  the 
citizens  of  each  State  the  disabilities  of  alienage  in  the  other 
States,  and  giving  them  equality  of  privilege  with  citizens  of  those 
States,  the  Republic  would  have  constituted  little  more  than  a 
leaeue  of  States;  it  would  not  have  constituted  the  Union  which 
now  exists. 

But  the  privileges  and  immunities  secured  to  citizens  of  each 
State  in  the  several  States,  by  the  provision  in  question,  are  those 
privileges  and  immunities  which  are  common  to  the  citizens  in  the 
latter  States  under  their  constitution  and  laws  by  virtue  of  their 
being  citizens.     Special  privileges  enjoyed  by  citizens  in  their  own 

'  Lemmon  v.  The  People,  20  N.  Y.  607. 


PAUL    V.    STATE    OF    VIRGINIA.  209 

States  are  not  secured  in  other  States  by  this  provision.  It  was 
not  intended  by  the  provision  to  give  to  the  laws  of  one  State  any 
operation  in  other  States.  They  can  have  no  such  operation,  ex- 
cept by  the  permission,  express  or  impHed,  of  those  States.  The 
special  privileges  which  they  confer  must,  therefore,  be  enjoyed 
at  home,  unless  the  assent  of  other  States  to  their  enjoyment 
therein  be  given. 

Now  a  grant  of  corporate  existence  is  a  grant  of  special  privi- 
leges to  the  corporators,  enabling  them  to  act  for  certain  desig- 
nated purposes  as  a  single  individual,  and  exempting  them  (unless 
otherwise  specially  provided)  from  individual  liability.  The  cor- 
poration being  the  mere  creation  of  local  law,  can  have  no  legal 
existence  beyond  the  lim.its  of  the  sovereignty  where  created.  As 
said  by  this  court  in  Bank  of  Augusta  v.  Earle,  "It  must  dwell 
in  the  place  of  its  creation,  and  can  not  migrate  to  another  sov- 
ereignty." The  recognition  of  its  existence  even  by  other  States, 
and  the  enforcement  of  its  contracts  made  therein,  depend  purely 
upon  the  comity  of  those  States — a  comity  which  is  never  ex- 
tended where  the  existence  of  the  corporation  or  the  exercise  of 
its  powers  are  prejudicial  to  their  interests  or  repugnant  to  their 
policy.  Having  no  absolute  right  of  recognition  in  other  States, 
but  depending  for  such  recognition  and  the  enforcement  of  its 
contracts  upon  their  assent,  it  follows,  as  a  matter  of  course,  that 
such  assent  may  be  granted  upon  such  terms  and  conditions  as 
those  States  may  think  proper  to  impose.  They  may  exclude  the 
foreign  corporation  entirely ;  they  may  restrict  its  business  to 
particular  localities,  or  they  may  exact  such  security  for  the  per- 
formance of  its  contracts  with  their  citizens  as  in  their  judgment 
will  best  promote  the  public  interest.  The  whole  matter  rests  in 
their  discretion. 

If,  on  the  other  hand,  the  provision  of  the  Constitution  could 
be  construed  to  secure  to  citizens  of  each  State  in  other  States 
the  peculiar  privileges  conferred  by  their  laws,  an  extra-territorial 
operation  would  be  given  to  local  legislation  utterly  destructive  of 
the  independence  and  the  harmony  of  the  States.  At  the  present 
day  corporations  are  multiplied  to  an  almost  indefinite  extent. 
There  is  scarcely  a  business  pursued  requiring  the  expenditure  of 
large  capital,  or  the  union  of  large  numbers,  that  is  not  carried 
on  by  corporations.  It  is  not  too  much  to  say  that  the  wealth  and 
business  of  the  country  are  to  a  great  extent  controlled  by  them. 
And  if.  when  composed  of  citizens  of  one  State,  their  corporate 
powers  and  franchises  could  be  exercised  in  other  States  without 
restriction,  it  is  easy  to  see  that,  with  the  advantages  thus  pos- 
sessed, the  most  important  business  of  those  States  would  soon 
pass  into  their  hands.  The  principal  business  of  every  State 
would,  in  fact,  be  controlled  by  corporations  created  by  other 
States. 

If  the  right  asserted  of  the  foreign  corporation,  when  composed 
of  citizens  of  one  State,  to  transact  business  in  other  States  were 

14 — Priv.\te  Corp. 


2IO  EXTILV-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

even  restricted  to  such  business  as  corporations  of  those  States 
were  authorized  to  transact,  it  would  still  follow  that  those  States 
would  be  unable  to  limit  the  number  of  corporations  doing  busi- 
ness therein.  They  could  not  charter  a  company  for  any  purpose, 
however  restricted,  without  at  once  opening  the  door  to  a  flood  of 
corporations  from  other  States  to  engage^  in  the  same  pursuits. 
They  could  not  repel  an  intruding  corporation,  except  on  the  con- 
dition of  refusing  incorporation  for  a  similar  purpose  to  their 
own  citizens;  and  yet  it  might  be  of  the  highest  public  interest 
that  the  number  of  corporations  in  the  State  should  be  limited; 
that  they  should  be  required  to  give  publicity  to  their  transactions ; 
to  submit  their  affairs  to  proper  examination;  to  be  subject  to  for- 
feiture of  their  corporate  rights  in  case  of  mismanagement,  and 
that  their  ofificers  should  be  held  to  a  strict  accountability  for  the 
manner  in  which  the  business  of  the  corporations  is  managed,  and 
be  liable  to  summary  removal. 

"It  is  impossible."  to  repeat  the  language  of  this  court  in  Bank 
of  Augusta  V.  Earle,  "upon  any  sound  principle,  to  give  such  a 
construction  to  the  article  in  question" — a  construction  which 
would  lead  to  results  like  these. 

We  proceed  to  the  sound  objection  urged  to  the  validity  of  the 
\''irginia  statute,  which  is  founded  upon  the  commercial  clause  of 
the  Constitution.  It  is  undoubtedly  true,  as  stated  by  counsel,  that 
the  power  conferred  upon  Congress  to  regulate  commerce  includes 
as  well  commerce  carried  on  by  corporations  as  commerce  carried 
on  by  individuals.  At  the  time  of  the  formation  of  the  Consti- 
tution a  large  part  of  the  commerce  of  the  world  was  carried  on 
by  corporations.  The  East  India  Company,  the  Hudson's  Bay 
Company,  the  Hamburgh  Company,  the  Levant  Company,  and  the 
Virginia  Company,  may  be  named  among  the  many  corporations 
then  in  existence  which  acquired,  from  the  extent  of  their  opera- 
tions, celebrity  throughout  the  commercial  world.  This  state  of 
facts  forbids  the  supposition  that  it  was  intended  in  the  grant  of 
power  to  Congress  to  exclude  from  its  control  the  commerce  of 
corporations.  The  language  of  the  grant  makes  no  reference  to 
the  instrumentalities  by  which  commerce  may  be  carried  on;  it  is 
general,  and  includes  alike  commerce  by  individuals,  partnerships, 
associations,  and  corporations. 

There  is,  therefore,  nothing  in  the  fact  that  the  insurance  com- 
panies of  New  York  are  corporations  to  impair  the  force  of  the 
argument  of  counsel.  The  defect  of  the  argument  lies  in  the  char- 
acter of  their  business.  Issuing  a  policy  of  insurance  is  not  a 
transaction  of  commerce.  The  policies  are  simple  contracts  of 
indemnity  against  loss  by  fire,  entered  into  between  the  corpora- 
tions and  the  assured,  for  a  consideration  paid  by  the  latter. 
These  contracts  are  not  articles  of  commerce  in  any  proper  mean- 
ing of  the  word.  They  are  not  subjects  of  trade  and  barter  of- 
fered in  the  market  as  something  having  an  existence  and  value 
independent  of  the  parties  to  them.     They  are  not  commodities 


PAUL    V.    STATE    OF    VIRGINIA.  211 

to  be  shipped  or  forwarded  from  one  State  to  another,  and  then 
put  up  for  sale.  They  are  Hke  other  personal  contracts  between 
parties  whioh  are  completed  by  their  signature  and  the  transfer 
of  the  consideration.  Such  contracts  are  not  interstate  transac- 
tions, though  the  parties  may  be  domiciled  in  different  States. 
The  policies  do  not  take  effect — are  not  executed  contracts — until 
delivered  by  the  agent  in  Mrginia.  They  are,  then,  local  transac- 
tions, and  are  governed  by  the  local  law.  They  do  not  constitute 
a  part  of  the  commerce  between  the  States  any  more  than  a  con- 
tract for  the  purchase  and  sale  of  goods  in  Mrginia  by  a  citizen 
of  Xew  York  whilst  in  Virginia  would  constitute  a  portion  of 
such  commerce. 

In  Nathan  v.  Louisiana,^  this  court  held  that  a  law  of  that  State 
imposing  a  tax  on  money  and  exchange  brokers,  who  dealt  entirely 
in  the  purchase  and  sale  of  foreign  bills  of  exchange,  was  not  in 
conflict  with  the  constitutional  power  of  Congress  to  regulate  com- 
merce. The  individual  thus  using  his  money  and  credit,  said  the 
court,  "is  not  engaged  in  commerce,  but  in  supplying  an  instru- 
ment of  commerce.  He  is  less  connected  with  it  than  the  ship- 
builder, without  whose  labor  foreign  commerce  could  not  be  car- 
ried on."  And  the  opinion  shows  that,  although  instruments  of 
commerce,  they  are  the  subjects  of  State  regulation,  and,  inferen- 
tially.  that  they  may  be  subjects  of  direct  State  taxation. 

"In  determining,"  said  the  court,  "on  the  nature  and  effect  of 
a  contract,  we  look  to  the  lex  loci  where  it  was  made,  or  where 
it  was  to  be  performed.  And  bills  of  exchange,  foreign  or  do- 
mestic, constitute,  it  would  seem,  no  exception  to  this  rule.  Some 
of  the  States  have  adopted  the  law  merchant,  others  have  not. 
The  time  within  which  a  demand  must  be  made  on  a  bill,  a  pro- 
test entered,  and  notice  given,  and  the  damages  to  be  recovered. 
\a.ry  with  the  usages  and  legal  enactments  of  the  different  States. 
These  laws,  in  various  forms  and  in  numerous  cases,  have  been 
sanctioned  by  this  court."  And  again :  "For  the  purposes  of  rev- 
enue the  Federal  government  has  taxed  bills  of  exchange,  foreign 
and  domestic,  and  promissory  notes,  whether  issued  by  indi\'iduals 
or  banks.  Now,  the  Federal  government  can  no  more  regulate 
the  commerce  of  a  State  than  a  State  can  regulate  the  commerce 
of  the  Federal  government;  and  domestic  bills  or  promissor}- 
notes  are  as  necessary  to  the  commerce  of  a  State  as  foreign  bill's 
to  the  commerce  of  the  Union.  And  if  a  tax  on  an  exchange 
broker  who  deals  in  foreign  bills  be  a  regulation  of  foreign  com- 
merce, or  commerce  among  the  States,  much  more  would  a  tax 
upon  State  paper,  by  Congress,  be  a  tax  on  the  commerce  of  a 
State." 

If  foreign  bills  of  exchange  may  thus  be  the  subject  of  State 
regulation,  much  more  so  may  contracts  of  insurance  against  loss 
by  fire. 

•8  Howard  73. 


212  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS^    ETC, 

We  perceive  nothing  in  the  statute  of  Virginia  which  conflicts 
with  the  Constitution  of  the  United  States;  and  the  judgment  of 
the  Supreme  Court  of  Appeals  of  that  State  must,  therefore,  be 
affirmed.^ 


BARROW  STEAMSHIP  CO.  v.  KANE. 
1897.     170  U.  S.   100,  42  L.  ed.  964,   18  Sup.  Ct.  526. 

MR.  JUSTICE  GRAY,  after  stating  the  case,  delivered  the 
opinion  of  the  court. 

This  action  was  brought  in  the  Circuit  Court  of  the  United 
States  for  the  Southern  District  of  New  York  against  the  Barrow 
Steamship  Company,  by  a  passenger  on  one  of  its  steamships  on 
a  voyage  from  Londonderry,  in  Ireland,  to  the  city  of  New  York, 
for  an  assault  upon  him  by  its  agents  in  the  port  of  Londonderry. 
The  certificate  of  the  Circuit  Court  of  Appeals  shows  that  the 
plaintiff  is  a  citizen  and  resident  of  the  State  of  New  Jersey;  that 
the  defendant  is  a  corporation,  organized  and  incorporated  under 
the  laws  of  the  United  Kingdom  of  Great  Britain  and  Ireland,  and 
a  common  carrier  running  a  line  of  steamships  from  ports  in  that 
kingdom  to  the  port  of  New  York,  and  does  business  in  the  State 
of  New  York,  through  a  mercantile  firm,  its  regularly  appointed 
agents,  and  upon  whom  the  summons  in  this  action  was  served. 

It  was  contended,  in  behalf  of  the  steamship  company,  that, 
being  a  foreign  corporation,  no  suit  could  be  maintained  against 
it  in  personam  in  this  country  without  its  consent,  express  or 
implied;  that  by  doing  business  in  the  State  of  New  York  it  con- 
sented to  be  sued  only  as  authorized  by  the  statutes  of  the  State ; 
that  the  jurisdiction  of  the  courts  of  the  United  States  held  within 
the  State  depended  on  the  authority  given  by  those  statutes;  that 
the  statutes  of  New  York  conferred  no  authority  upon  any  court 
to  issue  process  against  a  foreign  corporation  in  an  action  by  a 
non-resident,  and  for  a  cause  not  arising  within  the  State;  and 
therefore  that  the  Circuit  Court  acquired  no  jurisdiction  of  this 
action  brought  against  a  British  corporation  by  a  citizen  and  resi- 
dent of  New  Jersey. 

The  constant  tendency  of  judicial  decisions  in  modern  times  has 
been  in  the  direction  of  putting  corporations  upon  the  same  foot- 
ing as  natural  persons  in  regard  to  the  jurisdiction  of  suits  by  or 
against  them. 

By  the  Constitution  of  the  United  States,  the  judicial  power, 
so  far  as  depending  upon  citizenship  of  parties,  was  declared  to 
extend  to  controversies  "between  citizens"  of  a  State  and  foreign 
"citizens  or  subjects."  And  Congress,  by  the  Judiciary  Act  of 
1789,  in  defining  the  original  jurisdiction  of  the  Circuit  Courts  of 

"And  see,  Stooper  v.  California,  155  U.  S.  648,  39  L.  ed.  297,  15  Sup. 
Ct.  207.— Ed. 


BARROW  STEAMSHIP   CO.   V.   KANE.  213 

the  United  States,  described  each  party  to  such  a  controversy, 
either  as  "a  citizen"  of  a  State,  or  as  "an  aHen."  Act  of  Septem- 
ber 24,  1789,  c.  20,  §  11;  I  Stat.  78;  Rev.  Stat.  §  629.  Yet  the 
words  "citizens"  and  "aliens,"  in  these  provisions  of  the  Constitu- 
tion and  of  the  Judiciary  Act,  have  always  been  held  by  this  court 
to  include  corporations. 

The  jurisdiction  of  the  Circuit  Court  over  suits  between  a  citizen 
of  one  State  and  a  corporation  of  another  State  was  at  first  main- 
tained upon  tlie  theory  that  the  persons  composing  the  corpora- 
tion were  suing  or  being  sued  in  its  name,  and  upon  the  presump- 
tion of  fact  that  all  those  persons  were  citizens  of  the  State  by 
which  the  corporation  had  been  created ;  but  that  this  presumption 
might  be  rebutted,  by  plea  and  proof,  and  the  jurisdiction  thereby 
defeated.  Bank  of  United  States  v.  Deveaux,  5  Cranch,  61,  87, 
88;  Hope  Ins.  Co.  v.  Boardman,  5  Cranch,  57;  Commercial  Bank 
V.  Slocomb,  14  Pet.  60. 

But  the  earlier  cases  were  afterwards  overruled;  and  it  has  be- 
come the  settled  law  of  this  court  that,  for  the  purposes  of  suing 
and  being  sued  in  the  court  of  the  United  States,  a  corporation 
created  by  and  doing  business  in  a  State  is,  although  an  artificial 
person,  to  be  considered  as  a  citizen  of  the  State,  as  much  as  a 
natural  person ;  and  there  is  a  conclusive  presumption  of  law  that 
the  persons  composing  the  corporation  are  citizens  of  the  same 
State  with  the  corporation.  Louisville  &c.  Railroad  v.  Letson.  2 
How.  497,  558;  Marshall  v.  Baltimore  &  Ohio  Railroad,  16  How. 
314,  329;  IMuller  V.  Dows,  94  U.  S.  444;  Steamship  Co.  v.  Tug- 
man.  106  U.  S.  118;  St.  Louis  &  San  Francisco  Railway  v.  James, 
161  U.  S.  545,  555-559- 

In  Bank  of  Augusta  v.  Earle,  13  Pet.  519,  decided  before  the 
case  of  United  States  v.  Deveaux,  above  cited,  had  been  overruled, 
and  while  that  case  was  still  recognized  as  authority  for  the  prin- 
ciple that  in  a  question  of  jurisdiction  the  court  might  look  to  the 
character  of  the  persons  composing  a  corporation.  Chief  Justice 
Taney,  in  delivering  judgment,  said  that  the  principle  had  "never 
been  supposed  to  extend  to  contracts  made  by  a  corporation,  es- 
pecially in  another  sovereignty;"  but  that  "whenever  a  corpora- 
tion makes  a  contract,  it  is  the  contract  of  the  legal  entity;  of  the 
artificial  being  created  by  the  charter;  and  not  the  contract  of  the 
individual  members."     13  Pet.  586,  587. 

In  Bank  of  Augusta  v.  Earle.  it  was  adjudged  that  a  corporation 
created  by  one  State,  and  acting  within  the  scope  of  its  charter, 
might  do  business  and  make  contracts  in  another  State  when  per- 
mitted to  do  so  by  the  laws  thereof,  and  might  sue  upon  such 
contracts  in  the  courts  of  that  State.  As  was  said  in  the  opinion : 
"It  is  sufficient  that  its  existence  as  an  artificial  person,  in  the 
State  of  its  creation,  is  acknowledged  and  recognized  by  the  law 
of  the  nation  where  the  dealing  takes  place;  and  that  there  it  is 
permitted  by  the  laws  of  that  place  to  exercise  there  the  powers 
with  which  it  is  endowed."     13  Pet.  589.     And  it  was  declared 


214  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

to  be  well  settled  that  by  the  law  of  comity  among  nations,  pre- 
vailing among  the  several  States  of  the  Union,  "a  corporation 
created  by  one  sovereignty  is  permitted  to  make  contracts  in  an- 
other, and  to  sue  in  its  courts,"  except  as  to  contracts  repugnant 
to  its  own  policy.     13  Pet.  592. 

The  manifest  injustice  which  would  ensue,  if  a  foreign  corpora- 
tion, permitted  by  a  State  to  do  business  therein,  and  to  bring 
suits  in  its  courts,  could  not  be  sued  in  those  courts,  and  thus, 
while  allowed  the  benefits,  be  exempt  from  the  burdens,  of  the 
laws  of  the  State,  has  induced  many  States  to  provide  by  statute 
that  a  foreign  corporation  making  contracts  within  the  State  shall 
appoint  an  agent  residing  therein,  upon  whom  process  may  be 
served  in  actions  upon  such  contracts.  This  court  has  often  held 
that  wherever  such  a  statute  exists,  service  upon  an  agent  so 
appointed  is  sufficient  to  support  jurisdiction  of  an  action  against 
the  foreign  corporation,  either  in  the  courts  of  the  State,  or,  when 
consistent  with  the  acts  of  Congress,  in  the  courts  of  the  United 
States  held  within  the  State;  but  it  has  never  held  the  existence 
of  such  a  statute  to  be  essential  to  the  jurisdiction  of  the  Circuit 
Courts  of  the  United  States.  Lafayette  Ins.  Co.  v.  French,  18 
How.  404;  Ex  parte  Schollenberger,  96  U.  S.  369;  New  England 
Ins.  Co.  V.  Woodworth,  11 1  U.  S.  138,  146;  Shaw  v.  Quincy 
Mining  Co.,   145  U.  S.  444>  452- 

In  Lafayette  Ins.  Co.  v.  French,  the  court  said:  "We  limit  our 
decision  to  the  case  of  a  corporation  acting  in  a  State  foreign  to 
its  creation,  under  a  law  of  that  State  which  recognized  its  exist- 
ence, for  the  purposes  of  making  contracts  there  and  being  sued 
on  them,  through  notice  to  its  contracting  agents."  But  it  was 
cautiously  added:  "The  case  of  natural  persons,  or  of  other  for- 
eign corporations,  is  attended  with  other  considerations,  which 
might  or  might  not  distinguish  it;  upon  this  we  give  no  opinion." 
18  How.  408,  409. 

The  liability  of  a  foreign  corporation  to  be  sued  in  a  particular 
jurisdiction  need  not  be  distinctly  expressed  in  the  statutes  of  that 
jurisdiction,  but  may  be  implied  from  a  grant  of  authority  in  those 
statutes  to  carry  on  its  business  there. 

Accordingly,  in  Railroad  Co.  v.  Harris,  12  Wall.  65,  the  Balti- 
more &  Ohio  Railroad  Company,  a  corporation  chartered  by  the 
State  of  Maryland,  and  authorized  by  the  statutes  of  the  State 
of  Virginia  to  extend  its  railroad  into  that  State,  and  also  by  the 
act  of  Congress  of  March  2,  1831,  c.  85,  4  Stat.  476,  to  extend, 
construct  and  use  a  lateral  branch  of  its  railroad  into  and  within 
the  District  of  Columbia,  and  to  exercise  the  same  powers,  rights 
and  privileges,  and  be  subject  to  the  same  restrictions  in  regard 
thereto,  as  provided  in  its  charter,  was  held,  by  reason  of  the  act 
of  Congress,  and  of  service  upon  its  president  in  the  District  of 
Columbia,  to  be  liable  to  an  action  in  the  District  by  a  passenger 
for  an  injury  happening  in  the  State  of  Virginia;  although  the 
railroad   company   was   a   corporation   of  the   State   of   Maryland 


BARROW   STEAMSHIP   CO.   V.    KANE.  21 5 

only,  and  neither  the  act  of  Congress  authorizing  it  to  construct 
and  use  a  branch  railroad  in  the  District  of  Columbia,  nor  any 
other  act  of  Congress,  had  made  any  provision  for  bringing  suits 
against  foreign  corporations,  the  action  having  been  brought  be- 
fore the  passage  of  the  act  of  February  22,  1867,  c.  64,  §  ii;  14 
Stat.  404;  Rev.  Stat.  D.  C.  §  790.  Mr.  Justice  Swayne,  in  de- 
livering judgment,  said:  "If  the  theory  maintained  by  the  counsel 
for  the  plaintiff  in  error  be  correct,  however  large  or  small  the 
cause  of  action,  and  whether  it  were  a  proper  one  for  legal  or 
equitable  cognizance,  there  could  be  no  legal  redress  short  of  the 
seat  of  the  company  in  another  State.  In  many  instances  the 
cost  of  the  remedy  would  have  largely  exceeded  the  value  of  its 
fruits.  In  suits  local  in  their  character,  both  at  law  and  in  equity, 
there  could  be  no  relief.  The  result  would  be,  to  a  large  extent, 
immunity  from  all  legal  responsibility.  It  is  not  to  be  supposed 
that  Congress  intended  that  the  important  powers  and  privileges 
granted  should  be  followed  by  such  results.  But  turning  our  at- 
tention from  this  view  of  the  subject,  and  looking  at  the  statute 
alone,  and  reading  it  by  its  own  light,  we  entertain  no  doubt  that 
it  made  the  company  liable  to  suit,  where  this  suit  brought,  in  all 
respects  as  if  it  had  been  an  independent  corporation  of  the  same 
locality."     12  Wall.  83,  84. 

In  that  case,  it  is  to  be  observed,  the  cause  of  action  arose, 
neither  in  the  State  of  Maryland,  where  the  defendant  was  incor- 
porated, nor  in  the  District  of  Columbia,  where  the  action  was 
brought,  but  in  the  State  of  Virginia.  The  decision,  in  principle 
and  in  effect,  recognizes  that  a  corporation  of  one  State,  lawfully 
doing  business  in  another  State,  and  summoned  in  an  action  in  the 
latter  State  by  service  upon  its  principal  officer  therein,  is  subject 
to  the  jurisdiction  of  the  court  in  which  the  action  is  brought. 

In  England,  the  right  of  a  foreign  corporation  doing  business 
in  England  to  sue  in  the  English  courts  was  long  ago  recognized ; 
and  its  liability  to  be  subjected  to  suit  in  those  courts,  by  service 
made  upon  one  of  its  principal  officers  residing  and  representing 
it  within  the  realm,  has  been  fully  established  by  recent  decisions. 
Newby  v.  Von  Oppen,  L.  R.  7  Q.  B.  293 ;  Haggin  v.  Comptoir 
d'Escompte  de  Paris,  23  O.  B.  D.  519. 

In  the  courts  of  several  States  of  the  Union,  the  like  view  has 
prevailed.  Libbey  v.  Hidgdon,  9  N.  H.  394;  March  v.  Eastern 
Railroad  Co..  40  N.  H.  548,  579;  Day  v.  Essex  County  Bank,  13 
Vermont,  97;  Moulin  v.  Trenton  Ins.  Co.,  i  Dutcher  (25  N.  J. 
Law),  57;  Bushel  v.  Commonwealth  Ins.  Co.,  15  S.  &  R.  173; 
North  ^lissouri  Railroad  v.  Akers,  4  Kansas,  453,  469;  Council 
Bluffs  Co.  V.  Omaha  Co.,  49  Nebraska,  537.  The  courts  of  New 
York  and  Massachusetts,  indeed,  have  declined  to  take  jurisdic- 
tion of  suits  against  foreign  corporations,  except  so  far  as  it  has 
been  expressly  conferred  by  statutes  of  the  State.  McQueen  v. 
Middletown  Manuf.  Co.,  16  Johns.  5;  Robinson  v.  Oceanic  Steam 
Navigation    Co.,    112    N.   Y.    315;    Desper   v.    Continental    Water 


2l6  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC, 

Meter  Co.,  137  Mass.  252.  But  the  jurisdiction  of  the  Circuit 
Courts  of  the  United  States  is  not  created  by,  and  does  not  de- 
pend upon,  the  statutes  of  the  several  States. 

In  the  Circuit  Courts  of  the  United  States,  there  have  been  con- 
flicting opinions,  but  the  most  satisfactory  ones  are  those  of  Judge 
Drummond  and  Judge  Lowell  in  favor  of  the  liability  of  foreign 
corporations  to  be  sued.  Wilson  Packing  Co.  v.  Hunter,  8  Bis- 
sell,  429;  Hayden  v.  Androscoggin  Mills,  i  Fed.  Rep.  93. 

In  Lafayette  Ins.  Co.  v.  French,  above  cited,  this  court,  speak- 
ing by  Mr.  Justice  Curtis,  after  saying  that  a  corporation  created 
by  one  State  could  transact  business  in  another  State,  only  with 
the  consent,  express  or  implied,  of  the  latter  State,  and  ^  that  this 
consent  might  think  fit  to  impose,  defined  the  limits  of  its  power 
in  this  respect  by  adding,  "and  these  conditions  must  be  deemed 
valid  and  effectual  by  other  States,  and  by  this  court,  provided 
they  are  not  repugnant  to  the  Constitution  or  laws  of  the  United 
Sta'tes,  or  inconsistent  with  those  rules  of  public  law  which  secure 
the  jurisdiction  and  authority  of  each  State  from  encroachment 
by  all  others,  or  that  principle  of  natural  justice  which  forbids 
condemnation  without  opportunity  for  defense."     18  How.  407. 

The  object  of  the  provisions  of  the  Constitution  and  statutes  of 
the  United  States,  in  conferring  upon  the  Circuit  Courts  of  the 
United  States  jurisdiction  of  controversies  between  citizens  of 
different  States,  or  between  citizens  of  one  of  the  States  and 
aliens,  was  to  secure  a  tribunal  presumed  to  be  more  impartial 
than  a  court  of  the  State  in  which  one  of  the  litigants  resides. 

The  jurisdiction  so  conferred  upon  the  national  courts  cannot 
be  abridged  or  impaired  by  any  statute  of  a  State.  Hyde  v.  Stone, 
20  How.  170,  175;  Smyth  v.  Ames.  169  U.  S.  466,  516.  It  has 
therefore  been  decided  that  a  statute,  which  requires  all  actions 
against  a  county  to  be  brought  in  the  county  court,  does  not 
prevent  the  Circuit  Court  of  the  United  States  from  taking  juris- 
diction of  such  an  action;  Chief  Justice  Chase  saying  that  "no 
statute  limitation  of  suability  can  defeat  a  jurisdiction  given  by 
the  Constitution."  Cowles  v.  Mercer  County,  7  Wall.  118,  122; 
Lincoln  County  v.  Luning,  133  U.  S.  529;  Chicot  County  v.  Sher- 
wood, 148  U.  S.  529.  So  statutes  requiring  foreign  corporations, 
as  a  condition  of  being  permitted  to  do  business  within  the  State, 
to  stipulate  not  to  remove  into  the  courts  of  the  United  States 
suits  brought  against  them  in  the  courts  pf  the  State,  have  been 
adjudged  to  be  unconstitutional  and  void.  Home  Ins.  Co.  v. 
Morse,  20  Wall.  445;  Barron  v.  Burnside,  121  U.  S.  186;  South- 
ern Pacific  Co.  V.  Denton,  146  U.  S.  202. 

On  the  other  hand,  upon  the  fundamental  principle  that  no  one 
shall  be  condemned  unheard,  it  is  well  settled  that  in  a  suit  against 
a  corporation  of  one  State,  brought  in  a  court  of  the  United  States 
held  within  another  State,  in  which  the  corporation  neither  does 
business,  nor  has  authorized  any  person  to  represent  it.  service 
upon  one  of  its  officers  or  employes  found  within  the  State  will 


BARROW  STEAMSHIP  CO.   V.   KANE.  21/ 

not  support  the  jurisdiction,  notwithstanding  that  such  service  is 
recognized  as  sufficient  by  the  statutes  of  the  judicial  decisions  of 
the  State.  St.  Clair  v.  Cox.  io6  U.  S.  350;  Fitzgerald  Co.  v. 
Fitzgerald.  137  U.  S.  qS,  106;  Goldey  v.  Morning  News,  156  U. 
S.  518.     See  also  Mexican  Central  Railway  v.  Pinkney,  149  U.  S. 

By  the  existing  act  of  Congress  defining  the  general  jurisdic- 
tion of  the  Circuit  Courts  of  the  United  States,  those  courts 
"shall  have  original  cognizance,  concurrent  with  the  courts  of  the 
several  States,  of  all  suits  of  a  civil  nature,  at  common  law  or  in 
equity,  when  the  matter  in  dispute  exceeds,  exclusive  of  interest 
and  costs,  the  sum  or  value  of  two  thousand  dollars,"  "in  which 
there  shall  be  a  controversy  between  citizens  of  different  States," 
"or  a  controversy  between  citizens  of  a  State  and  foreign  States, 
citizens  or  subjects;"  and,  as  has  been  adjudged  by  this  court,  the 
subsequent  provisions  of  the  act,  as  to  the  district  in  which  suits 
must  be  brought,  have  no  application  to  a  suit  against  an  alien  or 
a  foreign  corporation ;  but  such  a  person  or  corporation  may  be 
sued  by  a  citizen  of  a  State  of  the  Union  in  any  district  in  which 
valid  service  can  be  made  upon  the  defendant.  Act  of  March  3. 
1887,  c.  373,  §  I,  as  corrected  by  the  act  of  August  13,  1888,  c. 
866,  §  i;  24  Stat.  552;  25  Stat.  434;  Shaw  v.  Quincy  Alining 
Co.,  T45;  U.  S.  444.  453;  In  re  Hohorst,  150  U.  S.  653;  Galveston 
Szc.  Railway  v.  Gonzales,  151  U.  S.  496,  503;  In  re  Keasbey  & 
Mattison  Co.,  160  U.  S.  221,  229,  230. 

The  present  action  was  brought  by  a  citizen  and  resident  of  the 
State  of  New  Jersey,  in  a  circuit  court  of  the  United  States  held 
within  the  State  of  New  York,  against  a  foreign  corporation 
doing  business  in  the  latter  State.  It  was  for  a  personal  tort 
committed  abroad,  such  as  would  have  been  actionable  if  com- 
mitted in  the  State  of  New  York,  or  elsewhere  in  this  country, 
and  an  action  for  which  might  be  maintained  in  any  Circuit  Court 
of  the  United  States  which  acquired  jurisdiction  of  the  defendant. 
Railroad  Co.  v.  Harris,  above  cited ;  Dennick  v.  Railroad  Co.,  103 
U.  S.  11;  Huntington  v.  Attrill,  146  U.  S.  657,  670,  675;  Stewart 
V.  Baltimore  &  Ohio  Railroad,  168  U.  S.  445.  The  summons  was 
duly  served  upon  the  regularly  appointed  agents  of  the  corporation 
in  New  York.  In  re  Hohorst,  above  cited.  The  action  was  within 
the  general  jurisdiction  conferred  by  Congress  upon  the  Circuit 
Courts  of  the  United  States.  The  fact  that  the  legislature  of  the 
State  of  New  York  has  not  seen  fit  to  authorize  like  suits  to  be 
brought  in  its  own  courts  by  citizens  and  residents  of  other  States 
can  not  deprive  such  citizens  of  their  right  to  invoke  the  jurisdic- 
tion of  the  national  courts  under  the  Constitution  and  laws  of 
the  United  States.  The  necessary  conclusion  is  that  the  Circuit 
Court  had  jurisdiction  to  try  the  action  and  to  render  judgment 
therein  against  the  defendant,  and  that  the  question  certified  must 
be  answered  in  the  affirmative.^ 

^And  see  the  following  cases:     Goldey  v.  Morning  News  (1894),   156 


2l8  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

PENN  COLLIERIES  CO.  v.  McKEEVER. 
1906.     183  N.  Y.  98,  75  N.  E.  935,  2  L.  R.  A.  (N.  S.)   127. 

Appeal  from  a  judgment  of  the  Appellate  Division  of  the  Su- 
preme Court  in  the  first  judicial  department,  entered  April  30, 
1904,  affirming  a  judgment  in  favor  of  plaintiff^  entered  upon  a 
decision  of  the  court  at  a  Trial  Term  without  a  jury. 

The  plaintiff,  a  foreign  corporation  organized  under  the  laws  of 
West  Virginia,  sued  for  the  price  of  a  cargo  of  coal,  which  it  had 
sold  and  delivered  to  the  defendant,  in  the  city  of  New  York. 
The  defense  to  the  suit  was  that,  as  the  plaintiff  was  doing  busi- 
ness in  this  state,  without  having  procured  from  the  secretary  of 
state  the  certificate  required  by  section  15  of  the  General  Corpo- 
ration Law,  it  could  not  maintain  any  action  upon  its  contracts. 
The  evidence  showed  that  the  coal  had  been  sold  by  an  agent  of 
the  company  in  the  city  of  New  York,  where  he  had  an  office  and 
which  he  made  his  headquarters,  as  the  company's  sales  agent  for 
the  middle  New  England  district  and  New  Jersey;  an  agency 
which  included  that  city  within  its  territory.  The  cargo  of  coal 
sold  to  the  defendant  appears  to  have  been  the  only  sale  of  coal 
ever  made  by  the  plaintiff  within  this  state.  The  coal  was  mined 
in  Pennsylvania;  it  was,  originally,  sold  in  New  Jersey;  it  had 
been  rejected  by  the  purchaser  in  New  York  and,  while  there  and 
in  the  canal  boat,  had  been  resold,  through  a  broker,  to  the  de- 
fendant. Usually,  orders  for  coal  were  forwarded  to  the  Penn- 
sylvania office  and  were  filled  from  there,  directly.  No  books  of 
account,  nor  bank  account,  were  kept  in  the  city  of  New_  York 
and  no  coal,  or  other  goods,  of  the  company,  were  kept  in  this 
state;  the  office  there  being,  solely,   for  the  agent's  convenience. 

Upon  the  evidence,  the  trial  judge  made  these  findings  of  fact, 
a  jury  having  been  waived,  that  the  plaintiff  had  not  procured  the 
statutory  certificate;  the  sale  and  delivery  to  the  defendant;  his 
promise  to  pay  therefor  and  his  refusal  to  make  payment,  and 
that  the  plaintiff  was  not  doing  business  in  the  state  within  the 
meaning  of  the  statute.  The  judgment  recovered  by  the  plaintiff 
has  been  affirmed  by  the  Appellate  Division,  in  the  first  depart- 
ment, by  a  divided  court.  The  defendant  further  appeals  to  this 
court  and  insists  that  the  plaintiff  was  doing  business  within  this 
state,  under  the  facts  disclosed  by  the  evidence,  within  the  pur- 
view of  the  provisions  of  the  General  Corporation  Law. 

U  S  518,  39  L.  ed.  517,  15  Sup.  Ct.  559  (service  on  foreign  corporation); 
Blake  v.  McClung  (1898),  172  U.  S.  239,  43  L.  ed.  432,  19  Sup.  Ct.  165; 
Herndon-Carter  Co.  v.  Norris  &  Co.  (1909),  224  U.  S.  496.  In  the  last 
cited  decision,  Justice  Day  said  (p.  499):  "It  has  frequently  been  held 
in  this  court  that  a  foreign  corporation,  in  order  to  be  subject  to  the 
jurisdiction  of  a  court,  must  be  doing  business  within  the  state  of  the 
court's  jurisdiction,  and  service  must  there  be  made  upon  some  duly 
authorized  officer  or  agent." — Ed. 


PENN    COLLIERIES    CO.    V.    MCKEEVER.  219 

GRAY,  J. — I  think  that  the  determination  below  was  correct. 
Section  15  of  the  General  Corporation  Law  prescribes  that,  "No 
foreign  stock  corporation,  other  than  a  moneyed  corporation,  shall 
do  business  in  this  state  without  having  first  procured  from  the 
secretary  of  state  a  certificate  that  it  has  complied  with  all  the 
requirements  of  law  to  authorize  it  to  do  business  in  this  state, 
and  that  the  business  of  the  corporation  to  be  carried  on  in  this 
state  is  such  as  may  be  lawfully  carried  on  by  a  corporation  in- 
corporated under  the  laws  of  this  state  for  such  or  similar  busi- 
ness," etc.  Further,  it  provides  that  "no  foreign  stock  corporation 
doing  business  in  this  state  shall  maintain  any  action  in  this  state 
upon  any  contract  made  by  it  in  this  state  unless  prior  to  the 
making  of  such  contract  it  shall  have  procured  such  certificate." 

I  am,  clearly,  of  the  opinion  that  the  statutory  provisions  were 
not  intended  for  any  such  case  as  this.  I  think  that  they  should 
be  construed,  both  upon  the  fair  import  of  their  language,  as  well 
as  upon  a  just  consideration  of  the  public  policy  and  of  the  state 
interests  to  be  promoted,  as,  simply,  preventing  foreign  corpora- 
tions from  entering  the  state  by  agencies  and  there  engaging  in 
the  general  prosecution  of  their  ordinary  business,  without  first 
complying  with  certain  requirements  of  a  reasonable  nature  and 
evidencing  their  compliance  by  obtaining  a  certificate  to  the  effect. 

The  policy  of  our  state,  as  manifested  in  its  laws,  is  not  to  im- 
pose any  unconscionable  restrictions  upon  the  transactions  of  for- 
eign corporations  here.  Their  right  to  transact  business  here 
has  always  been  conceded.  Indeed,  the  efifect  of  the  legislation 
of  recent  years  has  been  to  remove  all  barriers  in  their  way  and 
to  enable  them  to  come  here  freely;  provided  they  subjected  them- 
selves to  our  laws  and  exercised  no  powers  not  conferred  by  their 
charters.  That  is  to  say,  a  foreign  corporation  may  enter  our 
boundaries  as  freely  as  may  natural  persons  and  it  may  transact 
any  lawful  business  here ;  provided  that  it  takes  those  preliminary 
steps  prescribed  by  our  statutes,  which  evidence  its  corporate 
nature  and  purposes  and  which  secure  to  the  state  government  an 
effective  supervision  and  control  of  the  business  to  be  carried  on. 
The  statute  of  1892,  only,  declared  the  policy  of  this  state  that  a 
foreign  stock  corporation  should  not  carry  on  any  business  therein, 
which  a  domestic  corporation,  of  similar  nature,  could  not  law- 
fully conduct.  It  was  intended  to  place  them  upon  a  similar  foot- 
ing. (See  Lancaster  v.  Amsterdam  Impr.  Co..  140  N.  Y.  576; 
Neuchatel  Asphalte  Co.  v.  Mayor,  etc.,  of  N.  Y.,  155  ib.  373.) 
The  rule  was  early  declared  that,  unless  interdicted  by  the  state, 
a  foreign  corporation  could  perform  within  its  boundaries  single 
corporate  acts,  or  conduct  its  corporate  business,  when  not  pro- 
hibited by  our  laws,  or  when  not  violative  of  public  policy  (Bard 
v.  Poole,  12  N.  Y.  495 ;  Hollis  v.  Drew  Theological  Seminary,  95 
ib.  166),  and  the  enactment  of  the  present  General  Corporation 
Law  was  intended  to  regulate  its  existence  here,  if  proposing  to 
conduct   a  business,   by   the   imposition   of   reasonable   conditions. 


220  EXTRA-TERRITORIAL    POWERS    OF    CORPORATIONS,    ETC. 

But  no  such  narrow  policy  was  intended  to  be  declared  by  the 
statute  as  the  prohibition  of  all  corporate  transactions  by  foreign 
corporations,    irrespective    of    their    nature,    or    of    the    condition 
under   which   they   occurred;  nor   does   the   language   indicate   it. 
To  bring  into  operation  the  statutory  provision,  the  facts  should 
show  more  than  a  solitary,  if  not  accidental,  transaction  as  was 
the   one  before  us.     They   should   establish  that   the   corporation 
was  conducting  a  continuous  business.     To  be  "doing  business  in 
this  State"  implies  corporate  continuity  of  conduct  in  that  respect ; 
such  as  might  be  evidenced  by  the  investment  of  capital  here,  with 
the  maintenance  of  an  office  for  the  transaction  of  its  business, 
and  those  incidental  circumstances,  which  attest  the  corporate  in- 
tent to  avail  itself  of  the  privilege  to  carry  on  a  business.     In 
short,  it  should  appear,  as  it  was  intimated  in  the  opinion  in  Peo- 
ple ex  rel.  Armstrong  Cork  Co.  v.  Barker  (157  N.  Y.  165),  that 
the  corporation  and  its  officers  intended  "to  establish  a  continuous 
business  in  the  city  of  New  York  and  not  one  of  a  temporary 
character."     In  this  case  there  was  no  circumstance  to  evidence, 
in  any  degree,  anything  of  the  kind.     In  a  very  recent  case  it 
appeared  that  a  foreign  corporation,  having  a  manufacturing  plant 
without   the   state,   maintained   a   salesroom   in   the   city   of    New 
York,  to  which  some  of  its  manufactures  were  consigned  for  dis- 
tribution elsewhere,  upon  sales  made  at  the  home  office,  or   for 
sales  in   that  city,   and   it  was   sought   to  assess   it,_  upon   capital 
employed  here,   for  a  business   franchise  tax.     It  did  not  appear 
that  anything  was  done  here  by  the  corporation,  beyond  the  rnere 
maintenance  of  an  office  for  such  a  purpose,  and  the  determina- 
tion turned  upon  whether  the  two  essential  conditions  concurred, 
of    "doing   business    in   this    State"   and   of   some   portion   of    its 
capital  being  employed  here.     We  affirmed  a  determination  made 
below  that  the  corporation  was  not  assessable  and,  necessarily,  that 
determination  rested  upon  the  insufficiency  of  the  facts  to  establish 
that  it  was  "doing  business"  here.     (People  ex  rel.  A.  J.  Tower 
Co.  V.  Wells,  182  N.  Y.  553,  affg.  98  App.  Div.  82.) 
I  advise  the  affirmance  of  the  judgment,  with  costs. 
Cullen,  Ch.  J.,  Bartlett,  Haight,  Werner,  JJ.  (and  Vann,  J.,  in 
result),  concur;  O'Brien,  J.,  absent. 
Judgment  affirmed.^ 

'  In  Gaul  V.  Kiel  &  Arthe  Co.  (1910),  199  N.  Y.  472,  92  N.  E.  1069,  the 
court  said,  at  p.  478:  .... 

"It  is  also  contended  by  the  defendant  that  as  it  is  a  foreign  cor- 
poration and  it  does  not  appear  affirmatively  by  the  record  that  it  had 
obtained  a  license  to  do  business  in  this  state  pursuant  to  section  15 
of  the  General  Corporation  Law,  the  contract  should  be  held  to  be 
illegal  and  unenforcible.  It  is  enough  to  say  in  answer  to  this  proposi- 
tion that  the  statute  in  question  was  not  enacted  for  the  benefit  of 
foreign  corporations.  If  the  defendant  has  not  obtained  a  license  pur- 
suant to  such  statute  it  can  not  now  take  advantage  of  its  failure  to 
obey  such  statute  to  defeat  an  action  brought  against  it  in  this   state." 

See  also,  Mahar  v.  Harrington  Park  Villa  Sites  (1912),  204  N.  Y. 
231    97  N    E.  587,  holding  that  section   15,  above  referred  to,  imposes 


PENN    COLLIERIES    CO.    V.    MCKEEVER.  221 

only  on  the  foreign  corporation,  which  has  not  complied  with  its  pro- 
visions, the  penalty  of  being  unable  to  maintain  any  action  upon  a 
contract  made  by  it,  not  upon  the  other  party  to  the  contract. 

As  to  construction  of  section  15  in  the  Federal  courts,  see  David 
Lupton's  Sons  v.  Automobile  Club  of  America  (1911),  225  U.  S.  489, 
32  Sup.  Ct.  711. 

As  to  what  is  "doing  business"  within  a  state,  see  International  Text- 
Book  Co.  V.  Pigg  (1909),  217  U.  S.  91,  30  Sup.  Ct.  481. 

See  also,  Warren  v.  First  Nat.  Bank  (1893),  149  111.  9,  38  N.  E.  122, 
25  L.  R.  A.  746,  especially  pages  25-27;  Alleghany  Co.  v.  Allen  (1903). 
69  N.  J.  L.  270,  55  Atl.  724.— Ed. 


CHAPTER  X. 

CAPITAL    STOCK  :      HEREIN    ALSO    OF    THE    RIGHTS    OF    CREDITORS. 

BURRALL  V.  BUSHWICK  R.   CO. 
1878.     75  N.  Y.  211. 
Nature   of  Capital  Stock. 

Appeal  from  judgment  of  the  General  Term  of  the  City  Court 
of  Brooklyn,  in  favor  of  defendant,  entered  upon  an  order  re- 
versing an  order  of  Special  Term  which  overruled  a  demurrer 
to  the  complaint,  and  sustaining  such  demurrer  and  directing 
judgment  dismissing  the  complaint. 

The  complaint  in  this  action  after  setting  forth  the  incorpora- 
tion of  defendant,  alleged  as  follows : 

"Third.  That  said  defendant  by  its  authorized  officers,  did  on 
the  28th  day  of  March,  1868,  at  the  city  of  Brooklyn,  duly  issue 
a  paper,  of  which  the  following  is  a  copy: 

"BUSHWICK  RAILROAD  COMPANY, 

"Thompkins  Avenue  Branch. 

"Brooklyn,  March  25,   1868. 
"This  certifies  that  Charles  Foster  is  entitled  to  ten  (10)  shares 
of  the   capital   stock   of   the   Bushwick   Railroad   Company,   upon 
surrender  of  this  certificate  at  the  company's  office. 

"$i,ooo.  F.  W.  KALBFLEISH, 

"President." 

"Fourth.  That  said  paper  was  duly  delivered  to  the  said 
Charles  Foster,  at  or  about  the  date  thereof,  by  the  said  de- 
fendant, and  that  the  same  came  into  the  possession  of  this  plain- 
tiff by  purchase  for  value,  and  that  this  plaintiff  is  not  the  lawful 
owner  and  holder  of  the  same. 

"Fifth.  That  this  plaintiff,  by  his  duly  authorized  agent,  did. 
before  the  commencement  of  this  action,  present  said  certificate 
at  the  office  of  said  defendant,  in  accordance  with  the  terms  and 
requirements  thereof,  and  did  demand  the  issue  and*  delivery  to 
said   plaintiff   of  the   stock   therein   named    from   said   defendant. 

"Sixth.  That  said  defendant  refused  to  comply  with  the  terms 
of  said  certificate,  and  refused  to  issue  and  deliver  the  stock  with- 
out giving  any  reason  therefor." 

The  judgment  demanded  was: 

"ist.  That  the  defendant  be  required  and  adjudged  to  issue  and 
deliver  said  stock  to  this  plaintiff  in  accordance  with  said  certifi- 
cate and  the  promise  therein  contained,  and  pay  to  the  plaintiff 

222 


BURRALL   V.    BUSliWlCK    R.    CO.  223 

the  interest  upon  the  value  of  the  same,  to  wit,  interest  on  $i,ooo 
from  March  28,  1868. 

"2d.  In  case  of  a  failure  on  the  part  of  said  company  so  to  do, 
that  the  plaintiff  have  judgment  against  said  company  for  the  said 
sum  of  $1,000,  with  interest  as  aforesaid. 

"3d.  That  this  plaintiff  have  such  other  and  further  relief  as 
to  the  court  may  seem  just,  with  costs." 

Defendant  demurred  upon  the  ground  that  the  complaint  did  not 
state  facts  sufficient  to  constitute  a  cause  of  action. 

FOLGER,  J. — This  is  an  action,  in  which  a  judgment  is  asked 
against  a  business  corporation,  that  it  issue  and  deliver  ten  shares 
of  its  capital  stock  to  the  plaintiff,  in  accordance  with  a  certificate 
set  forth  in  the  complaint;  and  pay  to  him  the  interest  on  the 
value  of  the  same,  to  wit:  $1,000,  from  March  28,  1868.  It  is 
further  asked,  that  if  the  corporation  fail  so  to  do,  the  plaintiff 
may  have  judgment  against  it,  for  $1,000,  with  interest  from  the 
date  above  named.    There  is  also  the  prayer  for  alternative  relief. 

The  defendant  has  demurred  to  the  complaint,  and  assigns  as 
cause  of  demurrer,  that  it  does  not  state  facts  sufficient  to  consti- 
tute a  cause  of  action. 

It  is  plain  that  there  is  no  act  averred,  on  which  a  cause  of 
action  arises,  for  the  payment  of  interest  on  the  sum  of  $1,000 
from  28th  March,  1868;  or  on  any  sum,  for  any  length  of  time. 
No  averment  is  found,  in  the  allegations  of  the  complaint,  that 
the  shares  of  stock  are  of  any  value.  True,  in  the  prayer  for 
judgment,  it  is  said,  "upon  the  value  of  the  same,  to  wit,  interest 
on  the  sum  of  $1,000;"  but  that  is  not  an  averment  of  value. 
True  also,  in  the  copy  of  the  certificate  of  stock,  set  forth  in  the 
complaint,  there  are  the  character  and  figures  "$i,ooo;"  but  they 
do  not  make  an  averment  of  value ;  nor  is  there  any  averment 
that  there  was  a  duty  or  obligation  on  the  part  of  the  defendant 
to  pay  interest ;  nor  is  any  fact  averred,  from  which  such  duty 
or  obligation  can  appear,  or  be  inferred.  Nor  is  there  any  allega- 
tion which  will  sustain  an  action  to  recover  $1,000  and  interest 
thereon,  in  case  the  defendant  fails  to  issue  and  deliver  the  stock ; 
for,  as  has  been  said,  there  is  no  allegation  that  the  stock  was  at 
any  time  of  any  value.  The  complaint  and  its  averments  are  re- 
duced then  to  a  cause  of  action  to  compel  the  issuing  and  delivery 
of  shares  of  stock.  If  there  be  a  strict  interpretation  put  upon 
the  phrases  in  the  complaint,  viz.,  "shares  of  capital  stock,"  "stock 
therein  named,"  "the  stock,"  "said  stock;"  there  is  no  allegation 
in  the  complaint  sufficient  to  sustain  an  action  to  compel  the  issue 
and  delivery  of  those  shares.  The  phraseology  of  the  complaint 
has  been  used  in  this  particular,  with  an  inexact  notion  of  what 
is  the  capital  stock  of  a  business  corporation,  and  what  are  the 
shares  of  that  stock ;  though  it  would  seem  to  be  a  matter  that 
at  this  day  should  be  well  understood.  A  corporation  cannot  issue 
and  deliver  a  share  of  its  capital  stock.     By  the  joint  action  of 


224      CAPITAL  STOCK  :   HEREIN   ALSO  OF  THE  RIGHTS  OF  CREDITORS. 

the  corporation  and  the  subscriber  for  its  stock,  he  may  become 
the  owner  of  a  given  number  of  shares  thereof,  but  not  in  such  sense 
as  that  he  may  take  away  those  shares  out  of  the  common  corpor- 
ate fund.  The  capital  stock  is  that  money  or  property  which  is  put 
into  a  single  corporate  fund  by  those  who,  by  subscription  there- 
for, become  members  of  the  corporate  body.  That  fund  becomes 
the  property  of  the  aggregate  body  only,  A  share  of  the  capital 
stock  is  the  right  to  partake,  according  to  the  amount  put  into 
the  fund,  of  the  surplus  profits  of  the  corporation ;  and  ultimately 
on  the  dissolution  of  it,  or  so  much  of  the  fund  thus  created,  as 
remains  unimpaired,  and  is  not  liable  for  debts  of  the  corporation. 
Such  a  right  may  be  created  as  above  stated.  But  such  a  right, 
that  is,  such  a  share,  cannot  be  issued  and  delivered  by  a  corpora- 
tion, continuing  in  legal  existence,  and  carrying  on  the  business 
for  which  it  was  formed.  A  demand  that  it  deliver  a  share  of 
the  corporate  fund,  is  to  ask  of  it  something  which  it  has  not  the 
power  to  do,  and  which  it  will  not  be  compelled  to  do,  by  judg- 
ment; that  is  to  say.  upon  the  state  of  facts  set  up  in  this  com- 
plaint. It  cannot  take  from  the  capital  stock,  the  corporate  fund, 
a  part  or  parts  thereof  equal  in  number  to  the  shares  or  rights 
therein,  claimed  by  the  plaintiff,  and  hand  those  parts  to  him;  nor 
can  it,  on  the  facts  shown  by  the  complaint,  now  create  the  right 
which  those  shares  represent.  Those  shares  are  intangible,  and 
rest  in  abstract  legal  contemplation.  It  has  been  said  that  they 
are  not  a  species  of  property  that  can  be  transferred  by  delivery, 
and  that  the  assent  of  the  owner  to  part  with  it  must  be  expressed 
in  writing.  (Davis  v.  Bk.  of  England,  2  Bing.  393 ;  Dunn  v. 
Com.  Bank  of  Bufifalo,  11  Barb.  580.)  It  is  not  needful  that  we 
say  in  this  case  that  the  rule  goes  to  that  extent ;  the  saying  is 
cited  to  point  our  remark  that  the  share  itself  can  not  be  issued 
and  delivered  as  a  physical  act,  which  is  what  the  prayer  for 
judgment  literally  taken  asks  for.  What  the  corporation  can  do, 
and  what  in  some  circumstances  it  is  compellable  to  do,  is  to 
issue  and  deliver  the  written  evidence  of  the  existence  of  such 
shares,  and  of  the  ownership  of  them;  a  paper  usually  called  a 
stock  certificate.  It  is  true  that  the  paper  set  forth  in  the  com- 
plaint, as  issued  by  the  defendant,  declares  that  Charles  Foster 
is  entitled  to  ten  shares  of  its  capital  stock  in  the  surrender  of 
that  paper ;  it  is  possible  that  that  paper  was  not  meant  to  be 
what  we  have  called  a  stock  certificate ;  but  an  evidence  that  Fos- 
ter had  subscribed  for  capital  stock,  and  paid  in  the  amount,  and 
that  he  was  entitled  on  the  surrender  of  it  to  a  stock  certificate. 
Even  then  it  is  inexact,  for  by  the  subscription  and  payment  the 
shares  were  created,  and  he  became  the  owner,  and  entitled  to  all 
the  rights  attainable  thereby,  and  it  did  not  need  that  he  surrender 
the  paper  to  become  so  entitled.  In  rigidity  of  interpretation 
then,  the  complaint  shows  no  state  of  facts,  which  entitled  either 
Foster  or  the  plaintifif  to  the  issue  and  delivery  of  ten  shares  of 
the  capital  stock  of  the  defendant,  which  is  the  judgment  asked 


BURRALL  V.    BUSHWICK   R.    CO.  225 

for.  We  think,  however,  that  it  may  be  safely  held  for  the  pur- 
poses of  this  case,  that  the  paper  is  the  evidence  of  the  right  of 
Charles  Foster,  to  ten  shares  of  stock,  as  we  have  defined  them; 
and  that  the  averments  of  the  complaint,  and  the  prayer  for  judg- 
ment, were  for  the  issuing  and  delivery  to  the  plaintiff  of  some 
instrument  which  will  be  an  evidence,  and  a  muniment  to  him,  of 
an  assigned  right  to  those  shares.  Cases  may  exist,  where  the 
owner  of  such  a  right,  can  compel  the  corporation  in  whose  capital 
stock  it  exists,  to  issue  to  him  that  evidence.  And  we  have  seen 
that  the  cause  of  action  which  the  facts  of  this  complaint  show, 
if  they  show  any,  is  only  this.  To  constitute  this  cause  of  action 
they  must  show  the  plaintiff  to  be,  first,  the  owner  of  the  paper, 
and  of  the  right  which  it  evidences;  and,  second,  that  the  defend- 
ant has  unjustly  refused  to  take  from  him  a  surrender  of  the 
paper,  and  issue  to  him  a  new  certificate. 

The  only  averment  of  the  complaint  on  the  first  branch  of  this 
statement  is  that  the  paper  came  into  the  possession  of  the  plain- 
tiff by  purchase  for  value,  and  that  he  is  now  the  legal  owner  and 
holder  of  it.  The  fact  that  the  plaintiff  came  into  the  possession 
of  it  by  purchase  (that  is,  by  his  own  act  or  agreement),  for  value, 
is  quite  indefinite.  He  may  have  purchased  of  one  who  had  not 
himself  any  right  to  the  paper,  or  to  the  shares.  That  averment 
does  not  preclude  that  idea,  nor  necessarily  assert  a  getting  of 
possession  from  the  first  lawful  owner,  or  from  any  lawful  as- 
signee of  him.  The  allegation  does  not  come  up  to  that  held  suffi- 
ciently in  Prindle  v.  Caruthers  (15  N.  Y.  425),  for  their  property, 
not  possession  by  purchase,  was  alleged.  It  is,  however,  justified 
by  the  other  averment,  that  the  plaintiff  is  now  owner  and  holder. 
He  could  not  be  that,  unless  it  had  been  assigned  to  him,  by  the 
person  named  in  it,  or  by  someone  having  lawful  title  from  that 
person.  The  averment,  though  argumentative,  is  enough  to  au- 
thorize proof  of  all  the  fact ;  and  the  remedy  of  the  defendant 
for  the  informality  was  by  motion.  (Brown  v.  Richardson,  20 
N.  Y.  472.) 

Then  as  to  the  other  branch  of  the  statement.  Either  the  de- 
fendant had  some  rules,  by  virtue  of  its  charter,  or  its  by-laws, 
requiring  evidence  of  the  assignment  of  its  receipts  for  subscrip- 
tions to  stock,  and  of  its  stock  certificates,  and  authority  to  make 
transfer  of  shares  upon  its  books;  or  it  did  not.  H  it  did  not, 
if  no  act  was  to  be  done  by  it,  or  at  its  office,  then  the  act  of  the 
former  owner  of  the  stock,  whatever  it  was,  by  which  the  plain- 
tiff became  the  lawful  owner  and  holder  of  the  stock,  was  all  that 
he  needed  to  entitle  him  to  the  shares,  and  they  are  his  with  all 
their  advantages,  without  the  need  of  anything  being  done  by  the 
defendant.  (Com.  Bk.  of  Buffalo  v.  Kortright,  22  Wend.  34S.) 
And  if  it  has  not  required  any  formalities  to  be  observed,  before 
it  will  or  must  recognize  and  act  upon  a  lawful  transfer  of  title, 
then  the  plaintiff  being  secure  in  his  rights,  and  having  all  the 
evidence  thereof  which  the  defendant  will   exact,  cannot   compel 

15 — Private  Corp. 


226      CAPITAL  STOCK  :   HEREIN  ALSO  OF  THE  RIGHTS  OF   CREDITORS. 

an  extraordinary  act  on  the  part  of  the  defendant  for  his  own 
more  abundant  protection.  In  that  view  he  has  no  cause  of 
action.  On  the  other  hand,  if  the  defendant  has  with  authority 
so  to  do,  prescribed  rules  and  formaHties  to  be  observed  by  as- 
signees of  its  stock,  before  it  will  recognize  their  rights,  and 
give  them  evidence  that  such  rights  exist,  the  complaint  has  not 
averred  what  those  rules  and  formalities  are,  nor  has  it  in  par- 
ticular or  general  terms  averred  a  compliance  with  them.  We 
are  not  sure  that  we  may  not  assume  that  the  defendant  has 
prescribed  some  rules  and  formalities,  which  will  act  as  safe- 
guards to  itself,  to  its  stockholders,  and  to  the  public.  Learned 
judges  have  said  that  it  is  the  duty  of  business  corporations  so 
to  do,  and  we  may  not  assume  that  this  one  has  not  done  that 
duty,  until  the  complaint  avers  that  fact.  The  averment  of  the 
complaint  is  that  the  plaintiff  presented  the  certificate  at  the 
office  of  the  defendant  in  accordance  with  the  terms  and  require- 
ments thereof,  and  did  demand  from  the  defendant  the  issue  and 
delivery  to  him  of  the  stock  therein  named;  that  is,  in  the  mean- 
ing which  we  have  given  to  that  allegation,  that  the  defendant 
take  a  surrender  of  the  certificate  issued  to  Charles  Foster,  and 
issue  to  the  plaintiff  a  new  certificate.  Here  is  no  averment  that 
he  complied  with  any  rules  made  by  the  defendant  in  such  matter. 
We  know  how,  as  a  usual  thing,  a  transfer  of  stock  is  made.  It 
has  been  proven  many  times  in  the  courts,  and  the  process  is 
recited  in  the  reports.  An  assignment  of  the  stock  in  writing  is 
made  by  the  former  owner  of  it,  with  a  power  of  attorney  to 
transfer  it  on  the  books  of  the  corporation.  Books  of  transfer 
are  kept  for  that  purpose,  and  on  the  production  of  those  papers, 
the  nominated  attorney  makes  the  formal  transfer,  the  old.  certifi- 
cate is  canceled,  and  a  new  certificate  is  issued  to  the  new  owner. 
Yet  there  is  no  averment  here  that  the  plaintiff  produced  to  the 
defendant  aught  but  the  paper  or  certificate  once  held  by  Foster. 
Nothing  else  can  on  this  demurrer  be  assumed  to  have  been  pre- 
sented. Then  the  plaintiff  showed  to  the  defendant  no  evidence 
of  an  assignment  to  him,  nor  any  authority  to  anyone  to  make 
transfer  to  him.  He  did  not  then  put  the  defendant  in  default. 
His  complaint  states  no  cause  in  that  view. 

We  are  of  the  mind  that  in  any  view  in  which  the  case  can  be 
looked  at  that  the  complaint  is  too  meagre  in  its  statement  of 
facts  to  show  a  cause  of  action  in  the  plaintiff.  There  are  some 
other  considerations,  which  were  urged  upon  us  by  the  respondent, 
but  they  need  not  be  considered. 

The  judgment  should  be  affirmed,  and  the  plaintiff  have  leave  to 
amend  on  payment  of  costs. 

All  concur  except  Miller  and  Earl,  JJ.,  absent  at  argument. 

Judgment  accordingly. 


COOK    V.    CITY    OF    BURLINGTON.  22/ 

COOK  V.   CITY   OF   BURLINGTON. 

1882.     59  Iowa,  251,  13  N.  W.  113,  44  Am.  Rep.  679. 

Distinction    bctivecti   Shares   of   Stock   and   Capital   Stock. 

The  plaintiffs  are  the  executors  of  the  estate  of  James  W. 
Grimes,  deceased.  They  are  residents  of  the  city  of  BurHngton, 
where  the  estate  is  situated.  Part  of  the  estate  consists  of  shares 
of  stock  in  the  Dunleith  and  Dubuque  Bridge  Co.,  which  is  a 
corporation  of  that  name,  incorporated  under  the  general  incorpo- 
ration laws  of  the  State  of  Iowa,  and  having  its  principal  place  of 
business  in  Dubuque  county.  The  corporation  owns  a  bridge 
across  the  Mississippi  River,  from  the  city  of  Dubuque,  Iowa,  to 
the  eastern  shore  of  the  river  in  the  State  of  Illinois,  and  said 
bridge  is  all  the  tangible  property  owned  by  the  corporation.  The 
bridge  w^as  assessed  for  taxation  at  Dubuque,  and  the  taxes  were 
paid  The  shares  of  stock  in  the  bridge  company  held  and  owned 
by  the  estate  of  Grimes  were  also  assessed  for  taxation  for  the 
same  year  at  the  city  of  Burlington.  The  plaintiffs  claimed  that 
the  stock  was  not  liable  to  taxation,  and  appealed  from  the  board 
of  equalization  of  the  city  of  Burlington  to  the  Circuit  Court. 
Upon  a  trial  in  the  Circuit  Court  it  was  held  that  the  assessment 
of  the  stock  was  authorized  by  law%  and  plaintiffs  appeal. 

ROTHROCK,  J. — The  assessment  of  the  bridge  as  the  prop- 
erty of  the  corporation  w'as  authorized  by  law.  Appeal  of  The 
Des  Aloines  Water  Company,  48  Iowa,  324.  Whether  the  shares 
of  stock  can  be  legally  assessed  and  taxed  as  the  property  of  the 
stockholders  for  the  same  year  for  wdiich  the  property  of  the 
corporation  is  assessed  and  taxed  was  not  determined  in  that  case. 
It  was  said  however,  that  "the  statute  provides  that  the  stock  of 
such  corporations  shall  be  assessed  at  its  cash  value.  When  as- 
sessed and  taxed  under  the  statute,  stock  must  be  taxed  as  the 
property  of  the  respective  owners,  and  there  is  no  provision  mak- 
ing the  corporation  liable  therefor." 

We  have  then  the  question  in  this  case  whether  the  shares  of 
stock  may  be  taxed  in  addition  to  the  taxation  of  the  property  of 
the  corporation. 

And  we  may  say,  once  for  all.  at  the  outset,  that  our  views,  as 
expressed  in  the  case  just  cited,  that  the  statute  provides  that 
the  stock  shall  be  assessed  and  taxed,  remains  unchanged.  This 
conclusion  is  not  founded  upon  any  doubtful  construction  of  the 
statute,  but  upon  its  plain,  certain  and  unequivocal  language  and 
meaning.  The  statute  imposing  this  burden  upon  the  stock  is 
found  in  section  813  of  the  Code,  and  is  as  follows:  "Depreciated 
bank  notes  and  the  stock  of  corporations  and  companies  shall  be 
assessed  at  their  cash  value.     *     *     *" 

It  is  idle  to  contend  in  the  face  of  this  plain  and  explicit  Ian- 


228      CAPITAL  STOCK  :   HEREIN   ALSO  OF  THE  RIGHTS  OF  CREDITORS. 

guage  that  the  legislature  has  not  required  that  stock  in  corpora- 
tions shall  be  assessed,  and  the  only  question  now  for  determina- 
tion is,  does  the  legislature  have  the  power  to  determine  that  the 
property  of  a  corporation  and  the  stock  shall  both  be  taxed? 

Counsel  for  appellants  contend  that  no  such  power  exists,  be- 
cause it  is  duplicate  or  double  taxation  of  the  same  property,  and 
it  is  insisted  that  "this  court  has  over  and  over  again  declared 
that  double  taxation  is  forbidden  by  our  Constitution."  If  this 
statement  were  correct,  and  we  should  concede  that  the  question 
here  presented  were  one  of  duplicate  taxation,  the  case  could 
easily  and  speedily  be  disposed  of  by  a  prompt  reversal.  But, 
while  it  is  true  that  this  court  in  Tallman  v.  Butler  County,  12 
Iowa,  534,  said  that  it  "is  neither  the  policy  nor  the  justice  of 
the  law  to  tolerate  double  taxation,"  and  in  U.  S.  Express  Co.  v. 
Ellyson,  28  id.  378,  that  "double  taxation  would  be  so  unjust  as 
to  excite  disfavor  of  both  courts  and  legislature,"  and  in  Mc- 
Gregor's Executors  v.  Vanpel,  24  id.  436,  that  mortgages  upon  real 
estate  should  be  held  to  be  taxable  "unless  this  will  lead  to  double 
taxation,"  yet  it  never  has  been  held  in  this  State,  that  what_  is 
denominated  duplicate  taxation  is  in  excess  of  the  legislative 
power.  The  most  that  can  be  said  of  these  utterances  of  this 
court  is,  that  it  should  be  held  in  disfavor  by  courts  and  legisla- 
tures.    *     *     * 

It  must  be  conceded  that  the  taxation  of  the  property  of  the 
corporation  and  also  of  the  stock  bears  no  resemblance  to  taxing 
the  same  tract  of  land  twice  to  the  same  person,  nor  once  to  A, 
and  again  to  B.  That  would  be  a  double  taxation,  which  we 
suppose  would  not  be  allowable  in  any  State  in  the  Union.  It 
would  be  a  direct  discrimination  and  inequality  in  the  exercise 
of  the  taxing  power,  which  would  impose  a  greater  burden  upon 
one  citizen  than  upon  another  upon  the  same  kind  of  property. 
But  the  case  at  bar  is  quite  different.  The  corporation  is  a  person 
distinct  from  the  stockholder.  It  is  true,  it  is  what  is  denominated 
an  artificial  person,  and  may  be  said  to  be  ideal  and  intangible. 
But  that  it  is  a  person  in  law  is  the  first  principle  learned  by  the 
student  in  opening  any  book  on  corporations.  Its  stockholders  are 
distinct  and  different  persons.  They  are  usually  not  liable  for  its 
debts,  and  have  no  right  to  the  enjoyment  or  possession  of  its 
property  during  the  period  of  its  duration  or  until  it  be  dissolved 
by  some  procedure  known  to  the  law.  The  stockholder  is  entitled 
to  dividends  upon  his  stock,  if  there  be  any  dividends,  and  the 
value  of  his  stock  depends  upon  prospective  dividends,  and  the 
dividends  depend  upon  the  net  earnings  of  the  corporation.  If 
the  bridge  in  this  case  be  taxed,  the  tax  must  be  paid  from  the 
income,  and  this  reduces  the  value  of  the  stock,  so  that  there  is 
no  duplicate  taxation,  so  far  at  least  as  the  tax  upon  the  bridge 
reduces  the  value  of  the  stock.     *     *     * 

In  the  case  at  bar  the  stockholders  paid  to  the  corporation  a 
certain  sum  of  money.     The  corporation  used  this  money  in  the 


PEOPLE   EX    REL.    UNION    TRUST    CO.    V.    COLEMAN.  229 

construction  of  a  toll-bridge  from  which  the  corporation  derived 
an  income.  The  agreement  between  the  contracting  parties  is  that 
the  corporation  is  to  manage  and  control  the  bridge,  make  the 
necessary  repairs,  and  pay  the  taxes  assessed  against  the  bridge, 
and  after  deducting  these  legitimate  and  necessary  expenses  pay 
to  the  stockholder  his  proportionate  share  of  the  net  earnings,  and 
upon  the  dissolution  of  the  corporation  the  stockholder  is  to  be 
repaid  his  money  advanced  from  the  property  belonging  to  the 
dead  corporation.  Now,  suppose  this  very  contract  were  made 
with  a  natural  person  instead  of  a  corporation,  and  the  stock- 
holder or  creditor  should  make  a  claim  that  the  obligation  held 
by  him  was  not  taxable.  There  would  be  no  more  grounds  for 
such  claim  under  our  system  of  taxation  than  there  would  be  for 
the  claim  that  if  A  loans  B  $ioo,  which  is  invested  in  merchan- 
dise, the  debt  is  not  taxable  because  the  merchandise  is  taxable. 

These  illustrations,  it  appears  to  us,  demonstrate  that  if  we  were 
to  determine  that  the  legislature  has  no  constitutional  power  to 
impose  this  tax  upon  the  stockholder,  it  would  open  a  door  into 
a  sea  of  trouble  in  the  administration  of  the  revenue  laws  of  the 
State. 

In  disposing  of  this  important  question  we  have  not  reviewed 
the  authorities  cited  by  the  respective  counsel  of  the  parties.  It 
is  sufficient  to  say  that  these  views  are  supported  by  the  very 
great  majority  of  adjudged  cases  upon  this  subject.  We  think 
the  Circuit  Court  correctly  determined  that  the  shares  of  stock 
are  taxable.     *     *     * 

Affirmed. 

ADAMS,  J. — I  concur  in  the  result  reached  in  this  case,  but 
not  in  the  ground  upon  which  it  is  reached.  *  *  *  The  major- 
ity hold  that  such  taxation  would  not  be  double  taxation  in  such 
sense  that  it  is  not  allowable.  Upon  this  question  I  do  not  feel 
called  upon  to  express  any  opinion. 


PEOPLE  ex  rel.  UNION  TRUST  CO.  v.   COLEMAN. 

1891.     126  N.  Y.  433,  27  N.  E.  818,  12  L.  R.  A.  762.^ 

Capital — Capital  Stock — Shares. 

FINCH,  J. — The  relator  has  been  assessed  upon  an  "actual 
value"  of  its  capital  stock  derived  entirely  from  the  market  value 
of  its  shares.  These  are  selling  at  the  large  premium  of  some- 
thing over  five  hundred  dollars  for  each  share  of  one  hundred 
dollars,   and  the  assessors  have  concededly   taken   that  valuation, 

^The  facts  sufficiently  appear  in  the  opinion.  Portion  of  opinion 
omitted. — Ed. 


230      CAPITAL  stock:   HEREIN   ALSO  OF  THE  RIGHTS  OF  CREDITORS. 

or  the  principal  part  thereof,  as  the  "actual  value"  of  the  com- 
pany's stock  liable  to  taxation,  instead  of  its  own  proved  and  es- 
tablished value.  The  relator  challenges  the  assessment,  and 
through  all  the  proceeding  has  persistently  raised  and  pressed  the 
inquiry,  not  so  much  as  to  the  mode  or  manner  of  ascertaining 
value,  but  rather  as  to  what  is  the  precise  thing  to  be  valued, 
whether  the  capital  stock  of  the  company  or  the  capital  stock  held 
in  shares  by  the  corporators.  If  these  are  the  same,  or,  in  any 
just  sense,  equivalents,  either  might  be  valued  without  substantial 
error,  but  if  they  are  not  such,  we  must  determine  which  is  to  be 
valued  before  we  can  solve  the  problem  of  how  to  value  it. 

Now,  it  is  certain  that  the  two  things  are  neither  identical  nor 
equivalents.    The  capital  stock  of  a  company  is  one  thing;  that  of 
the  shareholders  is  another  and  different  thing.     That  of  the  com- 
pany is  simply  its  capital,  existing  in  money  or  property,  or  both ; 
while  that  of  the  shareholders  is  representative,  not  merely  of  that 
existing  and  tangible  capital,  but  also  of  surplus,  of  dividend  earn- 
ing power,  of  franchise  and  the  good  will  of  an  established  and 
prosperous  business.     The  capital  stock  of  the  company  is  owned 
and  held  by  the  company  in  its  corporate  character;  the  capital 
stock  of  the  shareholders  they  own  and  hold  in  different  propor- 
tions  as   individuals.     The   one   belongs   to   the   corporation;   the 
other  to  the  corporators.     The  franchise  of  the  company,  which 
may  be  deemed  its  business  opportunity  and  capacity,  is  the  prop- 
erty of  the  corporation,  but  constitutes  no  part  or  element  of  its 
capital  stock;  while  the  same  franchise  does  enter  into  and  form 
part,  and  a  very  essential  part,  of  the  shareholder's  capital  stock. 
While  the  nominal  or  par  value  of  the  capital  stock  and  of  the 
share  stock  are  the  same,  the  actual  value  is  often  widely  differ- 
ent.    The  capital  stock  of  the  company  may  be  wholly  in  cash  or 
in  property,  or  both,  which  may  be  counted  and  valued.     It  may 
have  in  addition  a  surplus,  consisting  of  some  accumulated  and 
reserved  fund,  or  of  undivided  profits,  or  both,  but  that  surplus 
is  no  part  of  the  company's  capital  stock,  and,  therefore,  is  not 
itself  capital  stock.    The  capital  cannot  be  divided  and  distributed; 
the  surplus  may  be.     But  that  surplus  does  enter  into  and  form 
part  of  the  share  stock,  for  that  represents  and  absorbs  into  its 
own  value  surplus  as  well  as  capital,  and  the  franchise  in  addition. 
So  that  the  property  of  every  company  may  consist  of^  three  sep- 
arate and  distinct  things,  which  are  its  capital  stock,  its  surplus, 
its  franchise;  but  these  three  things,  several  in  the  ownership  of 
the   company   are   united   in   the   ownership   of   the   shareholders. 
The   share   stock  covers,   embraces,   represents   all   three   in   their 
totality,  for  it  is  a  business  photograph  of  all  the  corporate  pos- 
sessions and  possibilities.     A  company  also  may  have  no  surplus, 
but,  on  the  contrary,  a  deficiency  which  works  an  impairment  of 
its  capital   stock.     Its  actual  value  is  then  less  than  its   nominal 
or  par  value,  while  yet  the  share  stock,  strengthened  by  hope  of 
the  future  and  the  support  of  earnings,  may  be  worth  its  par,  or 


PEOPLE    EX    REL.    UNION    TRUST    CO.    V.    COLEMAN.  23I 

even  more.  And  thus  the  two  things — the  company's  capital  stock 
and  the  shareholder's  capital  stock — are  essentially  and  in  every 
material  respect  different.  They  differ  in  their  character,  in  their 
elements,  in  their  ownership  and  in  their  values.  How  important 
and  vital  the  difference  is,  became  evident  in  the  effort  by  tlic 
state  authorities  to  tax  the  property  of  the  national  banks.  The 
effort  failed,  and  yet  the  share  stock  in  the  ownership  of  indi- 
viduals was  held  to  be  taxable  as  against  them.  The  corporation 
and  its  property  were  shielded,  but  the  shareholders  and  their 
property  were  taxed. 

Now  some  degree  of  confusion  and  trouble  have  come  in  be- 
cause these  two  different  things  are  denominated  alike  capital 
stock,  making  the  expression  sometimes  ambiguous.  It  is  the  im- 
portant and  decisive  phrase  in  the  law  of  1857,  under  which  the 
assessment  here  resisted  was  made,  and  requires  of  us  to  deter- 
mine at  the  outset  in  which  sense  it  was  used.  The  section  reads 
thus:  "The  capital  stock  of  every  company  liable  to  taxation,  ex- 
cept such  part  of  it  as  shall  have  been  excepted  in  the  assessment- 
roll,  or  shall  have  been  exempted  by  law,  together  with  its  surplus 
profits  or  reserved  funds  exceeding  ten  per  cent,  of  its  capital, 
after  deducting  the  assessed  value  of  its  real  estate,  and  all  shares 
of  stock  in  other  corporations  actually  owned  by  such  company 
which  are  taxable  upon  their  capital  stock  under  the  laws  of  this 
state,  shall  be  assessed  at  its  actual  value  and  taxed  in  the  same 
manner  as  the  other  real  and  personal  estate  of  the  county." 

There  are  reasons  in  abundance  for  the  conclusion  that  by  the 
phrase  "capital  stock"  the  statute  means  not  the  share  stock,  but 
the  capital  ow-ned  by  the  corporation ;  the  fund  required  to  be 
paid  in  and  kept  intact  as  the  basis  of  the  business  enterprise,  and 
the  chief  factor  in  its  safety.  One  ample  reason  is  derived  from 
the  fact  that  the  tax  is  assessed  against  the  corporation  and  upon 
its  property,  and  not  against  the  shareholders,  and  so  upon  their 
property.  In  theory  every  tax  is  charged  against  some  person, 
natural  or  artificial,  resident  or  non-resident,  known  or  unknown. 
It  is  assessed  not  upon  property  irrespective  of  ownership,  but 
against  persons  in  respect  to  their  property  (23  N.  Y.  215),  and 
effects  not  merely  a  lien,  but  also  a  personal  liability.  On  the  as- 
sessment-rolls in  this  case  appeared  the  name  of  the  relator  as  the 
person  assessed,  and  the  amount  of  the  tax  became  a  charge 
against  it.  Of  course,  it  could  only  be  assessed  and  taxed  in  re- 
spect to  its  own  property,  that  which  in  its  corporate  character  it 
owned  and  possessed,  and  so  it  follows  inevitably  that  the  statute 
concerns  the  company's  capital  stock,  that  is  its  real  and  actual 
capital,  and  not  in  any  respect  the  share  stock  which  it  does  not 
own  and  whose  possessors  have  not  been  assessed. 

Another  reason  is  found  in  those  terms  of  the  statute  which 
include  and  exclude  respectively  specific  kinds  or  classes  of  proj)- 
erty  in  the  corporate  ownership.  Thus  the  assessment  is  to  be  laid 
not  merely  upon  the  capital  stock  of  the  corporation,  but  also  upon 


2T,2      CAPITAL  STOCK  :   HEREIN   ALSO  OF  THE  RIGHTS  OF  CREDITORS. 

its  surplus.  No  such  explicit  direction  was  necessary,  except  upon 
the  assumption  that  by  the  words  "capital  stock"  was  meant  simply 
"capital,"  which  would  not  include  surplus,  and  so  required  that 
it  be  subjected  by  name  to  the  valuation.  If  the  share  stock  \yas 
meant  its  value  would  include  surplus  and  make  its  specification 
not  only  needless,  but  confusing.  But  while  the  statute  includes 
surplus  by  specific  mention,  it  excludes  franchise  by  omitting  it. 
The  omission  of  franchise  is  emphasized  by  the  careful  inclusion 
of  surplus.  It  is  fully  and  definitely  settled  that  the  tax  imposed 
by  the  statute  is  not  upon  franchise.  (People  v.  Comrs.  of  Taxes, 
2  Black's  (U.  S.)  620.)  But  if  that  be  so,  it  is  not  upon  the 
share  stock,  for  that  represents  the  value  of  the  corporate  fran- 
chise as  a  part  of  the  total  of  the  corporate  property.  And  so, 
both  by  what  it  specifically  includes  and  silently  excludes,  the  stat- 
ute itself  informs  us  that  by  "capital  stock"  it  means  and  intends 
the  company's  actual  capital  paid  in  and  possessed,  and  not  at  all 
or  in  any  sense  the  share  stock. 

The  same  thing  becomes  apparent  from  a  study  of  the  whole 
line  of  legislation  which  culminated  in  the  law  of  1857.  It  was 
traced  in  detail  upon  the  argument  with  great  industry  and  wealth 
of  illustration.  We  have  verified  it  by  traveling  over  the  same 
track,  and  without  taking  pains  to  reproduce  it,  may  assert  the 
general  result  which  it  discloses  and  select  out  one  or  more  illus- 
trations. The  investigation  shows  that  the  word  "capital"  and 
the  phrase  "capital  stock"  are  used  interchangeably  and  synony- 
mously, and  where  the  latter  phrase  occurs  there  is  almost  always 
something  in  the  statute  which  stamps  and  labels  it  as  referring 
to  the  actual  capital  of  the  company.  Thus  the  law  of  1825 
(Chap.  262),  after  providing  for  the  taxation  of  all  persons  own- 
ing or  possessing  property,  proceeds  to  declare  that  corporations 
shall  be  deemed  persons  for  the  purposes  of  the  act,  and  requires 
them  to  furnish  a  statement  of  the  amount  of  "capital"  actually 
paid  in ;  and  then,  referring  to  turnpike  and  bridge  companies,  re- 
quires them  to  state  "the  amount  of  capital  stock  actually  paid  in 
or  secured  to  be  paid  in."  Both  clauses  refer  to  the  same  assets 
or  fund,  naming  it  indiscriminately  "capital"  and  "capital  stock.'* 
Again,  in  the  law  of  1825  (Chap.  254)  the  assessors,  after  put- 
ting the  corporation  by  name  on  the  assessment-roll,  are  required 
to  add  the  amount  "of  its  capital  stock  paid  in  or  secured  to  be 
paid  in,"  and  to  designate  how  much  of  it  is  in  real  and  how 
much  in  personal  property,  and  so  no  doubt  is  left  that  by  "capital 
stock"  was  meant  simply  the  "capital"  possessed  in  cash  or  in- 
vested in  securities  or  real  estate. 

The  illustrations  might  be  multiplied  and  fortified  by  reference 
to  numerous  acts  relating  to  the  formation  or  management  of  man- 
ufacturing, railroad,  business  and  telegraph  companies  in  which 
the  two  forms  of  expression  are  used  indiscriminately  and  as  con- 
vertible terms;  but  I  think  quite  enough  has  been  said  to  require 
unhesitating  assent  to  the  proposition  that  under  the  law  of  1857, 


PEOPLE  EX  REL.  UNION  TRUST  CO.  V.  COLEMAN.       233 

the  thing  to  be  taxed  is  the  capital  of  the  company  and  not  the 
shares  of  the  stockholders. 

Indeed,  I  should  feel  bound  to  apologize  for  arguing  what  seems 
to  me  so  simple  and  plain  a  proposition,  were  it  not  for  the  fact 
that  it  has  been  largely  ignored  by  assessors  and  not  always  clearly 
kept  in  mind  by  the  courts,  and  but  for  the  further  fact  that  the 
right  to  adopt  as  the  taxable  valuation  the  value  of  the  shares, 
totally  disregarding  the  value  of  the  company's  capital,  has  been 
asserted  in  this  case,  maintained  by  the  courts  below,  and  claimed 
to  be  fully  justified  by  very  much  which  we  ourselves  have  de- 
cided or  said. 

(The  learned  judge  proceeded  to  examine  the  earlier  cases  in 
detail.) 

And  so  I  think  the  authorities  either  fairly  permit  or  fully  jus- 
tify the  conclusions  which  I  have  reached  and  which  may  be 
stated  with  reasonable  accuracy  thus:  First,  the  subject  of  valua- 
tion and  assessment  is  never  the  share  stock,  but  always  the  com- 
pany's capital  and  surplus.  Second,  such  capital  and  surplus  must 
be  assessed  at  its  own  value,  and  when  that  is  correctly  known 
and  ascertained,  no  other  value  can  be  substituted  for  it.  Third, 
where  its  amount  and  value  are  undisclosed  and  unknown  the  as- 
sessors may  consider  the  market  value  of  the  share  stock  and  the 
general  condition  of  the  company  as  indicative  of  surplus  or  de- 
ficiency and  of  the  probable  amount  of  either.  Fourth,  they  may 
further  resort  to  such  means  of  information  when  the  amount 
of  capital  and  surplus  is  disclosed,  but  the  assessors  have  suffi- 
cient reason  to  disbelieve  the  statement,  and  such  reason  is 
founded  upon  facts  established  by  competent  proof. 

If  these  conclusions  are  correct  it  will  follow  that  the  assess- 
ment complained  of  should  be  canceled.  The  corporation  pre- 
sented to  the  assessors  a  sworn  statement  of  its  assets  and  lia- 
bilities. If  it  be  true,  there  was  nothing  subject  to  assessment. 
But  its  truth  is  not  questioned,  and  there  is  not  the  least  reason 
to  doubt  it.  The  assessors  did  not  doubt  it :  they  merely  deemed 
it  immaterial,  and  so  testified  when  examined.  In  other  words, 
knowing  with  certainty  the  value  of  one  thing,  they  claimed  the 
right  to  affix  to  it  the  larger  value  of  a  dififerent  thing.  Author- 
ized only  to  tax  against  the  company  its  capital  and  surplus,  they 
assumed  the  right  practically  to  tax  it  for  the  share  stock  held 
by  individuals.  They  have  not  in  terms  claimed  that  the  share 
stock  is  the  subject  of  taxation,  nor  has  the  counsel  who  repre- 
sented them  on  the  argument,  but  both  have  maintained  and  de- 
fended what  is  the  exact  and  complete  equivalent.  The  right  as- 
serted is  a  discretion  in  the  assessors  at  their  free  will  to  assess 
corporations  upon  and  at  the  value  of  their  capital  and  surplus,  or 
upon  and  at  the  value  of  the  share  stock  independently  of  estab- 
lished facts  and  whenever  they  please.  The  law  gives  them  no 
such  discretion.  How  it  has  been  exercised  and  how  destructively 
to  the  rights  of  taxpayers  may  be  seen  by  comparing  the  action  in 


234     CAPITAL  stock:  herein  also  of  the  rights  of  creditors. 

this  case  with  that  in  one  of  the  cases  which  we  have  reviewed. 
Where  the  share  stock  was  seUing  at  ninety,  and  so  below  par, 
the  assessors  refused  to  take  that  value  and  went  to  the  company's 
books  in  search  of  a  larger  one,  which  they  found  and  adopted. 
Here,  where  the  actual  value  of  capital  and  surplus  is  established 
so  that  they  frankly  admit  the  fact,  they  calmly  disregard  it  and 
fly  to  the  larger  value  of  the  share  stock.  The  statute  has  given 
them  no  such  right.  They  are  not  lawless  rovers,  wandering 
among  corporations  at  will,  but  regular  officers  bound  by  disci- 
pline and  controlled  by  the  law,  and  whose  discretion  exists  within 
fixed  and  definite  limits.     *     *     * 

It  follows  that  the  judgment  and  order  of  the  General  and  the 
Special  Term  should  be  reversed  and  the  assessment  against  the 
relator  vacated  and  canceled,  without  costs. 

All  concur,  except  Peckham,  J.,  not  voting. 

Judgment  reversed. 


SAWYER  V.  HOAG. 

Supreme  Court  of  the  United  States. 

1873.     17  Wall.  610,  21  L.  ed.  731. 

The  Trust  Fund  Theory — Nature  of  Capital  Stock. 

The  Lumberman's  Insurance  Company  of  Chicago  was  found 
to  be  insolvent  after  the  disastrous  fire  of  October,  187 1,  and  in 
June,  1872,  a  petition  was  filed  under  which  it  was  declared  bank- 
rupt, and  the  appellee  appointed  assignee.  The  appellant  was  a 
stockholder  in  the  company  to  the  extent  of  fifty  shares  of  $100 
each.  Among  the  effects  of  the  company  which  came  to  the  hands 
of  the  assignee  was  a  note  of  appellant  for  $4,250;  and  when  pay- 
ment was  demanded  of  him,  he  produced  and  offered  to  set  off 
against  this  demand  the  certificate  of  an  adjusted  loss  given  by 
the  company  to  one  Hayes  for  $5,000,  which  had  been  assigned 
by  Hayes  to  appellant.  This  certificate  was  given  to  Hayes  and 
purchased  by  appellant  at  thirty-three  per  cent,  of  its  par  value  on 
the  same  day,  namely,  January  25,  1872,  after  the  insolvency  of 
the  company  was  well  known,  but  before  any  proceedings  in  bank- 
ruptcy had  been  commenced.  Upon  the  refusal  of  the  assignee 
to  consent  to  this  set-off,  the  appellant  filed  the  present  bill  in 
the  district  court  to  enforce  the  set-off  in  which  he  alleged,  among 
other  things,  that  the  note  given  by  him  to  the  Insurance  com- 
pany was  for  money  loaned. 

The  assignee  in  his  answer  denied  that  the  note  was  for  money 
loaned,  and  averred  that  it  was  in  fact  for  a  balance  due  by  appel- 
lant for  his  stock  subscription  which  had  never  been  paid,  and 
insisted  that  such  balances  constitute  a  trust  fund  for  the  benefit 


SAWYER    V.    HOAG.  235 

of  all  creditors  of  the  insolvent  corporation,  which  cannot  be 
made  the  subject  of  a  set-off  against  an  ordinary  debt  due  by  the 
company  to  any  one  of  its  creditors.  After  the  general  replica- 
tion, the  case  was  submitted  to  the  district  court  on  an  agreed 
statement  of  facts.  The  district  court  decreed  against  the  com- 
plainant, from  which  he  appealed  to  the  circuit  court,  which  af- 
firmed the  decree  below,  and  from  that  decree  it  is  brought  by 
appeal  to  this  court. 

MR.  JUSTICE  MILLER :  The  f^rst  and  most  important  ques- 
tion to  be  decided  is,  whether  the  indebtedness  of  the  appellant  to 
the  Insurance  company  is  to  be  treated,  for  the  purposes  of  this 
suit,  as  really  based  on  a  loan  of  money  by  the  company  to  him, 
or  as  representing  his  unpaid  stock  subscription. 

The  charter  under  which  the  company  was  organized  author- 
ized it  to  commence  business  upon  a  capital  stock  of  $100,000, 
with  $10,000  paid  in,  and  the  remainder  secured  by  notes  with 
mortgages  on  real  estate  or  otherwise.  The  transaction  by  which 
the  appellant  professes  to  have  paid  up  his  stock  subscription  is, 
shortly,  this:  he  gave  to  the  company  his  check  for  the  full 
amount  of  his  subscription,  namely.  $5,000.  He  took  the  check 
of  the  company  for  $4,250,  being  the  amount  of  his  subscription 
less  the  fifteen  per  cent,  required  of  each  stockholder  to  be  paid 
in  cash,  and  he  gave  his  note  for  the  amount  of  the  latter  check, 
with  good  collateral  security  for  its  payment,  with  interest  at  seven 
per  cent,  per  annum.  The  appellant  and  the  company,  by  its 
ofificers,  agreed  to  call  this  latter  transaction  a  loan,  and  the  check 
of  the  appellant  payment  in  full  of  his  stock;  and  on  the  books 
of  the  company,  and  in  all  other  respects  as  between  themselves, 
it  was  treated  as  payment  of  the  subscription  and  a  loan  of  money. 
It  is  agreed  that  at  this  time  the  current  rate  of  interest  in  Chi- 
cago was  greater  than  seven  per  cent.,  and  it  is  not  stated  as  a 
fact  whether  these  checks  were  ever  presented  and  paid  at  any 
bank,  or  that  any  money  was  actually  paid  or  received  by  either 
party  in  the  transaction.  It  must,  therefore,  be  treated  as  an 
agreement  between  the  corporation,  by  its  ofificers,  on  the  one  part, 
and  the  appellant,  as  a  subscriber  to  the  stock  of  the  company,  on 
the  other  part,  to  convert  the  debt  which  the  latter  owed  to  the 
company  for  his  stock  into  a  debt  for  the  loan  of  money,  thereby 
extinguishing  the  stock  debt. 

Undoubtedly  this  transaction,  if  nothing  unfair  was  intended, 
was  one  which  the  parties  could  do  effectually  as  far  as  they 
alone  were  concerned.  Two  private  persons  could  thus  change 
the  nature  of  the  indebtedness  of  one  to  the  other  if  it  was  found 
to  be  mutually  convenient  to  do  so.  And.  in  any  controversy 
which  might  or  could  grow  out  of  the  matter  between  the  insur- 
ance company  and  the  appellant,  we  are  not  prepared  to  say  that 
the  company,  as  a  corporate  body,  could  deny  that  the  stock  was 
paid  in  full. 


236      CAPITAL  STOCK  :   HEREIN  ALSO  OF  THE  RIGHTS  OF   CREDITORS. 

And  on  this  consideration  one  of  the  main  arguments  on 
which  the  appellant  seeks  to  reverse  the  decree  stands.  He  as- 
sumes that  the  assignee  in  bankruptcy  is  the  representative  alone 
of  the  corporation,  and  can  assert  no  right  which  it  could  not 
have  asserted.  The  weakness  of  the  argument  is  in  this  assump- 
tion. The  assignee  is  the  representative  of  the  creditors  as  well 
as  the  bankrupt.  He  is  appointed  by  the  creditors.  The  statute 
is  full  of  authority  to  him  to  sue  for  and  recover  property,  rights 
and  credits,  where  the  bankrupt  could  not  have  sustained  the 
action,  and  to  set  aside  as  void,  transactions  by  which  the  bank- 
rupt himself  would  be  bound.  All  this,  of  course,  is  in  the  inter- 
est of  the  creditors  of  the  bankrupt. 

Had  the  creditors  of  this  insolvent  corporation  any  right  to 
look  into  and  assail  the  transaction  by  which  the  appellant  claims 
to  have  paid  his  stock  subscription? 

Though  it  be  a  doctrine  of  modern  date,  we  think  it  now  well 
established  that  the  capital  stock  of  a  corporation,  especially  its 
unpaid  subscriptions,  is  a  trust  fund  for  the  benefit  of  the  general 
creditors  of  the  corporation.  And  when  we  consider  the  rapid 
development  of  corporations  as  instrumentalities  of  the  commer- 
cial and  business  world  in  the  last  few  years,  with  the  correspond- 
ing necessities  of  adapting  legal  principles  to  the  new  and  vary- 
ing exigencies  of  this  business,  it  is  no  solid  objection  to  such  a 
principle  that  it  is  modern,  for  the  occasion  for  it  could  not  sooner 
have  arisen. 

The  principle  is  fully  asserted  in  two  recent  cases  in  this  court, 
namely:  Burke  v.  Smith,  16  Wall.  390,  and  in  New  Albany  v. 
Burke,  11  Wall.  96.  Both  these  cases  turned  upon  the  doctrine 
we  have  stated,  and  upon  the  necessary  inference  from  that 
doctrine,  that  the  governing  officers  of  a  corporation  cannot,  by 
agreement  or  other  transaction  with  the  stockholder,  release  the 
latter  from  his  obligation  to  pay,  to  the  prejudice  of  its  cred- 
itors, except  by  fair  and  honest  dealing  and  for  a  valuable  con- 
sideration. 

In  the  latter  case,  a  judgment  creditor  of  an  insolvent  railroad 
company  having  exhausted  his  remedy  at  law,  sought  to  enforce 
this  principle  by  a  bill  in  chancery  against  the  stockholders.  The 
court  by  affirming  the  right  of  the  corporation  to  deal  with  the 
debt  due  it  for  stock,  as  with  any  other  debt,  would  have  ended 
the  case  without  further  inquiry.  But  asserting,  on  the  contrary, 
to  its  full  extent,  that  such  stock  debts  were  trust  funds  in  their 
hands  for  the  benefit  of  the  corporate  creditors,  and  must  in  all 
cases  be  dealt  with  as  trust  funds  are  dealt  with,  it  was  found 
necessary  to  go  into  an  elaborate  inquiry  to  ascertain  whether  a 
violation  of  the  trust  had  been  committed.  And  though  the  court 
find  that  the  transaction  by  which  the  stockholders  had  been  re- 
leased was  a  fair  and  valid  one,  as  founded  on  the  conditions  of 
the  original  subscription,  the  assertion  of  the  general  rule  on  the 
subject  is  none  the  less  authoritative  and  emphatic. 


SAWYER   V.    HOAG.  237 

In  the  case  before  us  the  assignee  of  the  bankrupt,  in  the  in- 
terest of  the  creditors  has  a  right  to  inquire  into  this  conventional 
payment  of  his  stock  by  one  of  the  shareholders  of  the  company; 
and  on  that  inquiry,  we  are  of  opinion  that,  as  to  these  creditors, 
there  was  no  valid  payment  of  this  stock  by  the  appellant.  We  do 
not  base  this  upon  the  ground  that  no  money  actually  passed 
between  the  parties.  It  would  have  been  just  the  same  if,  agree- 
ing beforehand  to  turn  the  stock  debt  into  a  loan,  the  appellant 
had  brought  the  money  with  him,  paid  it,  taken  a  receipt  for  it, 
and  carried  it  away  with  him.  This  would  be  precisely  the  equiv- 
alent of  the  exchange  of  checks  between  the  parties.  It  is  the 
intent  and  purpose  of  the  transaction  which  forbids  it  to  be 
treated  as  valid  payment.  It  is  the  change  of  the  character  of 
the  debt  from  one  of  a  stock  subscription  unpaid  to  that  of  a  loan 
of  money.  The  debt  ceases  by  this  operation,  if  effectual,  to  be 
the  trust  found  to  which  creditors  can  look,  and  becomes  ordinary 
assets,  with  which  the  directors  may  deal  as  they  choose. 

And  this  was  precisely  what  was  designed  by  the  parties.  It 
divested  the  claim  against  the  stockholder  of  its  character  of  a 
trust  fund,  and  enabled  both  him  and  the  directors  to  deal  with 
it  freed  from  that  charge.  There  are  three  or  four  of  these  cases 
now  before  us  in  which  precisely  the  same  thing  was  done  by 
other  insurance  companies  organized  in  Chicago,  and  we  have  no 
doubt  it  was  done  by  this  company  in  regard  to  all  their  stock- 
holders. 

It  was,  therefore,  a  regular  system  of  operations  to  the  injury 
of  the  creditor,  beneficial  alone  to  the  stockholder  and  the  corpora- 
tion. 

We  do  not  believe  we  characterize  it  too  strongly  when  we 
say  that  it  was  a  fraud  upon  the  public  who  were  expected  to 
deal  with  them. 

The  result  of  it  was  that  the  capital  stock  of  the  company  was 
neither  paid  up  in  actual  money,  nor  did  it  exist  in  the  form  of 
deferred  installments  properly  secured. 

It  is  said  by  the  appellant's  counsel  that,  conceding  this,  it  is 
still  a  debt  due  by  him  to  the  corporation  at  the  time  that  he  be- 
came the  owner  of  the  debt  due  by  the  corporation  to  Hayes  and, 
therefore,  the  proper  subject  of  set-ofif  under  the  20th  section  of 
the  Bankrupt  Act.  That  section  is  as  follows :  "In  all  cases  of 
mutual  debts  or  mutual  credits  between  the  parties,  the  account 
between  them  shall  be  stated,  and  one  debt  set  off  against  the 
other,  and  the  balance  only  shall  be  allowed  or  paid,  but  no  set- 
off shall  be  allowed  of  a  claim  in  its  nature  not  provable  against 
the  estate:  Provided,  that  no  set-off  shall  be  allowed  in  favor  of 
any  debtor  to  the  bankrupt  of  a  claim  purchased  by  or  trans- 
ferred to  him  after  the  filing  of  the  petition." 

This  section  was  not  intended  to  enlarge  the  doctrine  of  set- 
off, or  to  enable  a  party  to  make  a  set-off  in  cases  where  the  prin- 
ciples of  legal  or  equitable  set-off  did  not  previously  authorize  it. 


238      CAPITAL  stock:   HEREIN  ALSO  OF  THE  RIGHTS  OF   CREDITORS. 

The  debts  must  be  mutual ;  must  be  in  the  same  right. 

The  case  before  us  is  not  of  that  character.  The  debt  which 
the  appellant  owed  for  his  stock  was  a  trust  fund  devoted  to  the 
payment  of  all  the  creditors  of  the  company.  As  soon  as 
the  company  became  insolvent,  and  this  fact  became  known  to 
appellant,  the  right  of  set-ofif  for  an  ordinary  debt  to  its  full 
amount  ceased.  It  became  a  fund  belonging  equally  in  equity  to 
all  the  creditors,  and  could  not  be  appropriated  by  the  debtor  to 
the  exclusive  payment  of  his  own  claim. 

It  is  unnecessary  to  go  into  the  inquiry  whether  this  claim 
was  acquired  before  the  commission  of  an  act  of  bankruptcy  by 
the  company,  or  the  efifect  of  tlie  bankruptcy  proceeding.  The 
result  would  be  the  same  if  the  corporation  was  in  the  process 
of  liquidation  in  the  hands  of  a  trustee  or  under  other  legal  pro- 
ceedings. It  would  still  remain  true  that  the  unpaid  stock  was  a 
trust  fund  for  all  the  creditors,  which  could  not  be  applied  exclu- 
sively to  the  payment  of  one  claim,  though  held  by  the  stock- 
holder who  owed  that  amount  on  his  subscription. 

Nor  do  we  think  the  relation  of  the  appellant  in  this  case  to  the 
corporation  is  without  weight  in  the  solution  of  the  question  be- 
fore us.  It  is  very  true  that,  by  the  power  of  the  legislature, 
there  is  created  in  all  acts  of  incorporation  a  legal  entity  which 
can  contract  with  its  shareholders  in  the  ordinary  transactions  of 
business  as  with  other  persons.  It  can  buy  of  them,  sell  to  them, 
make  loans  to  them,  and  in  insurance  companies  make  contracts 
of  insurance  with  them,  in  all  of  which  both  parties  are  bound  by 
the  ordinary  laws  of  contract.  The  stockholder  is  also  relieved 
from  personal  liability  for  the  debts  of  the  company.  But  after 
all,  this  artificial  body  is  but  the  representative  of  its  stockholders, 
and  exists  mainly  for  their  benefit,  and  is  governed  and  controlled 
by  them  through  the  officers  whom  they  elect.  And  the  interest 
and  power  of  legal  control  of  each  shareholder  is  in  exact  propor- 
tion to  the  amount  of  his  stock.  It  is,  therefore,  but  just  that 
when  the  interest  of  the  public,  or  of  strangers,  dealing  with  this 
corporation  is  to  be  affected  by  any  transaction  between  the  stock- 
holders who  own  the  corporation  and  the  corporation  itself,  such 
transaction  should  be  subject  to  a  rigid  scrutiny,  and  if  found  to 
be  infected  with  anything  unfair  toward  such  third  person,  cal- 
culated to  injure  him,  or  designed  intentionally  and  inequitably 
to  screen  the  stockholder  from  loss  at  the  expense  of  the  general 
creditor,  it  should  be  disregarded  or  annulled  so  far  as  it  may  in- 
equitably affect  him. 

Affirmed. 


HOSPES  V.   NORTHWESTERN    MANUFACTURING   &   CAR   CO.         239 

HOSPES  V.   NORTHWESTERN   MANUFACTURING   & 

CAR  CO. 

1892.    48  Minn.  174,  50  N.  W.  11 17,  15  L.  R.  A.  470,  31  Am. 

St.  637. 

The    Trust   Fund    Theory — Modern    Vieiv — Bonus    Stock. 

MITCHELL,  J. :  This  appeal  is  from  an  order  overruling  a 
demurrer  to  the  so-called  "supplemental  complaint"  of  the  Minne- 
sota Thresher  Manufacturing  Company.  The  Northwestern  Man- 
ufacturing &  Car  Company  was  a  manufacturing  corporation  or- 
ganized in  May,  1882.  Upon  the  complaint  of  a  judgment  cred- 
itor (Hospes  &  Co.),  after  return  of  execution  unsatisfied,  judg- 
ment was  rendered  in  ]\Iay,  1884,  sequestrating  all  its  property, 
things  in  action,  and  effects,  and  appointing  a  receiver  of  the  same. 
This  receivership  still  continues,  the  affairs  of  the  corporation 
being  not  yet  fully  administered;  but  it  appears  that  it  is  hope- 
lessly insolvent,  and  that  all  the  assets  that  have  come  into  the 
hands  of  the  receiver  will  not  be  sufficient  to  pay  any  considerable 
part  of  the  debts.  The  Minnesota  Thresher  Manufacturing  Com- 
pany, a  corporation  organized  in  November,  1884,  as  creditor, 
became  a  party  to  the  sequestration  proceeding,  and  proved  its 
claims  against  the  insolvent  corporation.  In  October,  1889,  in 
behalf  of  itself  and  all  other  creditors  who  have  exhibited  their 
claims,  it  filed  this  complaint  against  certain  stockholders  (these 
appellants)  of  the  car  company  in  pursuance  of  an  order  of  court 
allowing  it  to  do  so,  and  requiring  those  thus  impleaded  to  ap- 
pear and  answer  the  complaint.  The  object  is  to  recover  from 
these  stockholders  the  amount  of  certain  stock  held  by  them,  but 
alleged  never  to  have  been  paid  for.  What  was  said  in  Aleagher's 
Case,  48  Minn.  158,  is  equally  applicable  here  as  to  the  right 
to  enforce  such  a  liability  in  the  sequestration  proceeding  upon 
the  petition  or  complaint  of  creditors  who  have  become  parties 
to  it.  There  is  nothing  in  this  practice  inconsistent  with  what 
was  decided  in  Thresher  Co.  v.  Langdon,  44  Minn.  37,  46  N. 
W.  Rep.  310.  The  complaint  is  not  the  commencement  of  an  in- 
dependent action  by  creditors  in  their  own  behalf  antagonistic  to 
the  rights  of  the  receiver,  but  is  filed  in  the  sequestration  pro- 
ceeding itself,  and  in  aid  of  it. 

The  principal  question  in  the  case  is  whether  the  complaint 
states  facts  showing  that  the  thresher  company,  as  creditor,  is 
entitled  to  the  relief  prayed  for;  or  in  other  words,  states  a  cause 
of  action.  Briefly  stated,  the  allegations  of  the  complaint  are 
that  on  May  10,  1882,  Seymour,  Sabin  &  Co.  owned  property  of 
the  value  of  several  million  dollars,  and  a  business  then  supposed 
to  be  profitable.  That,  in  order  to  continue  and  enlarge  this  busi- 
ness, the  parties  interested  in  Seymour,  Sabin  &  Co.,  with  others, 
organized  the  car  company,  to  which  was  sold  the  greater  part  of 


240      CAPITAL  STOCK  :   HEREIN   ALSO  OF  THE  RIGHTS  OF  CREDITORS. 

the  assets  of  Seymour,  Sabin  &  Co.  at  a  valuation  of  $2,267,000, 
in  payment  of  which  there  were  issued  to  Seymour,  Sabin  &  Co. 
shares  of  the  preferred  stock  of  the  car  company  of  the  par  value 
of  $2,267,000,  it  being  then  and  there  agreed  by  both  parties  that 
this  stock  was  in  full  payment  of  the  property  thus  purchased.  It 
is  further  alleged  that  the  stockholders  of  Seymour,  Sabin  &  Co., 
and  the  other  persons  who  had  agreed  to  become  stockholders  in 
the  car  company,  were  then  desirous  of  issuing  to  themselves,  and 
obtaining  for  their  own  benefit,  a  large  amount  of  comrnon  stock 
of  the  car  company,  "without  paying  therefore,  and  without  in- 
curring any  liability  thereon  or  to  pay  therefor;"  and  for  that 
purpose,  and  "in  order  to  evade  and  set  at  naught  the  laws  of 
this  state,"  they  caused  Seymour,  Sabin  &  Co.  to  subscribe  for 
and  agree  to  take  common  stock  of  the  car  company  of  the  par 
value  of  $1,500,000.  That  Seymour,  Sabin  &  Co.  thereupon  sub- 
scribed for  that  amount  of  the  common  stock,  but  never  paid 
therefor  any  consideration  whatever,  either  in  money  or  property. 
That  thereafter  these  persons  caused  this  stock  to  be  issued  to  D. 
M.  Sabin  as  trustee,  to  be  by  him  distributed  among  them.  That 
it  was  so  distributed  without  receipt  by  him  or  the  car  company 
from  any  one  of  any  consideration  whatever,  but  was  given  by 
the  car  company  and  received  by  these  parties  entirely  "gratui- 
tously." The  car  company  was,  at  this  time,  free  from  debt,  but 
afterwards  became  indebted  to  various  persons  for  about  $3,000,- 
000.  The  thresher  company,  incorporated  after  the  insolvency 
and  receivership  of  the  car  company,  for  the  purpose  of  securing 
possession  of  its  assets,  property,  and  business,  and  therewith  en- 
gaging in  and  continuing  the  same  kind  of  manufacturing,  prior 
to  October  27,  1887,  purchased  and  became  the  owner  of  unse- 
cured claims  against  the  car  company,  "bona  fide,  and  for  a  val- 
uable consideration,"  to  the  aggregate  amount  of  $1,703,000.  As 
creditor,  standing  on  the  purchase  of  these  debts,  which  were 
contracted  after  the  issue  of  this  "bonus"  stock,  the  thresher 
company  files  this  complaint  to  recover  the  par  value  of  the  stock 
as  never  having  been  paid  for.  The  complaint  does  not  allege 
what  the  consideration  of  these  debts  was,  nor  to  whom  origi- 
nally owing,  nor  what  the  intervener  paid  for  them,  nor  whether 
any  of  the  original  creditors  trusted  the  car  company  on  the  faith 
of  the  bonus  stock  having  been  paid  for.  Neither  does  it  allege 
that  either  the  thresher  company  or  its  assignors  were  ignorant 
of  the  bonus  issue  of  stock,  nor  that  they  or  any  of  them  were  de- 
ceived or  damaged  in  fact  by  such  issue,  nor  that  the  bonus  stock 
was  of  any  value.  Neither  is  there  any  traversable  allegation  of 
any  actual  fraud  or  intent  to  deceive  or  injure  creditors.  A  desire 
to  get  something  without  paying  for  it,  and  actually  getting  it, 
is  not  fraudulent  or  unlawful  if  the  donor  consents,  and  no  one 
•  else  is  injured  by  it;  and  the  general  allegation  that  it  was  done 
"in  order  to  evade  and  set  at  naught  the  laws  of  the  state"  of 
itself  amounts  to  nothing  but  a  mere  conclusion  of  law.     As  a 


HOSPES  V.   NORTHWESTERN    MANUFACTURING  &  CAR  CO.         24I 

creditors'  bill,  in  the  ordinary  sense,  the  complaint  is  manifestly 
insufificient.  The  thresher  company,  however,  plants  itself  upon 
the  so-called  "trust  fund"  doctrine  that  the  capital  stock  of  a 
corporation  is  a  trust  fund  for  the  payment  of  its  debts;  its  con- 
tention being  that  such  a  "bonus"  issue  of  stock  creates,  in  case 
of  the  subsequent  insolvency  of  the  corporation,  a  liability  on  part 
of  the  stockholder  in  favor  of  creditors  to  pay  for  it,  notwith- 
standing his  contract  with  the  corporation  to  the  contrary. 

This  "trust  fund"  doctrine,  commonly  called  the  "American 
doctrine,"  has  given  rise  to  much  confusion  of  ideas  as  to  its  real 
meaning,  and  much  conflict  of  decision  in  its  application.  To 
such  an  extent  has  this  been  the  case  that  many  have  questioned 
the  accuracy  of  the  phrase,  as  well  as  doubted  the  necessity  or  ex- 
pediency of  inventing  any  such  doctrine.  While  a  convenient 
phrase  to  express  a  certain  general  idea,  it  is  not  sufficiently  pre- 
cise or  accurate  to  constitute  a  safe  foundation  upon  which  to 
build  a  system  of  legal  rules.  The  doctrine  was  invented  by  Jus- 
tice Story  in  Wood  v.  Dummer,  3  IMason,  308,  which  called  for 
no  such  invention,  the  fact  in  that  case  being  that  a  bank  divided 
up  two-thirds  of  its  capital  among  its  stockholders  without  pro- 
viding funds  sufficient  to  pay  its  outstanding  bill-holders.  Upon 
old  and  familiar  principles  this  was  a  fraud  on  creditors.  Evi- 
dently all  that  the  eminent  jurist  meant  by  the  doctrine  was  that 
corporate  property  must  be  first  appropriated  to  the  payment  of 
the  debts  of  the  company  before  there  can  be  any  distribution  of 
it  among  stockholders — a  proposition  that  is  sound  upon  the  plain- 
est principles  of  common  honesty.  In  Fogg  v.  Blair,  133  U.  S. 
541,  10  Sup.  Ct.  Rep.  338,  it  is  said  that  this  is  all  the  doctrine 
means.  The  expression  used  in  Wood  v.  Dummer  has,  however, 
been  taken  up  as  a  new  discovery,  which  furnished  a  solution  of 
every  question  on  the  subject.  The  phrase  that  "the  capital  of  a 
corporation  constitutes  a  trust  fund  for  the  benefit  of  creditors" 
is  misleading.  Corporate  property  is  not  held  in  trust,  in  any 
proper  sense  of  the  term.  A  trust  implies  two  estates  or  inter- 
ests— one  equitable  and  one  legal ;  one  person,  as  trustee,  holding 
the  legal  title,  while  another,  as  the  cestui  que  trust,  has  the  bene- 
ficial interest.  Absolute  control  and  power  of  disposition  are  in- 
consistent with  the  idea  of  a  trust.  The  capital  of  a  corporation 
is  its  property.  It  has  the  whole  beneficial  interest  in  it,  as  well 
as  the  legal  title.  It  may  use  the  income  and  profits  of  it.  and  sell 
and  dispose  of  it.  the  same  as  a  natural  person.  It  is  a  trustee  for 
its  creditors  in  the  same  sense  and  to  the  same  extent  as  a  natural 
person,  but  no  further.  This  is  well  illustrated  and  clearly  an- 
nounced in  the  case  of  Graham  v.  La  Crosse  &  M.  R.  Co.,  102  U. 
S.  148.  That  was  a  creditors'  suit  to  reach  a  piece  of  real  estate 
on  the  ground  that  it  had  been  conveyed  by  the  corporation  fraud- 
ulently for  a  wholly  inadequate  consideration.  The  trust-fund 
doctrine  was  invoked  by  a  subsequent  creditor,  and  it  was  claimed 
that,  as  the  trust  had  been  violated,  the  deed  should  be  set  aside. 

16 — Private  Corp. 


242       CAPITAL   stock:    HEREIN   ALSO   OF  THE  RIGHTS  OF   CREDITORS. 

If  the  premise  was  correct  that  the  corporation  held  it  in  trust 
for  creditors,  the  conclusion  was  inevitable ;  but  the  court  denied 
the  premise,  saying  that  a  corporation  is  in  law  as  distinct  a  being 
as  an  individual  is,  and  is  entitled  to  hold  propert}^  (if  not  con- 
trary to  its  charter)  as  absolutely  as  an  individual  cari  hold  it. 
Its  estate  is  the  same,  its  interest  is  the  same,  its  possession  is  the 
same;  and  that  there  is  no  reason  why  the  disposal  by  a  corpora- 
tion of  any  of  its  property  should  be  questioned  by  svibsequent 
creditors  any  more  than  a  like  disposal  by  an  individual ;  that  the 
same  principles  of  law  apply  to  each.  That  the  phrase  that  "the 
capital  of  a  corporation  is  a  trust  fund  for  the  payment  of  its 
creditors"  is  misleading,  if  not  inaccurate,  is  illustrated  by  the 
character  of  the  actions  that  are  frequently  mistakenly  instituted 
on  the  strength  of  it.  For  example,  in  the  case  of  Wabash  etc.  R. 
Co.  V.  Ham,  114  U.  S.  587,  5  Sup.  Ct.  Rep.  1081,  two  roads  had 
been  consolidated,  the  new  company  acquiring  the  property  of  the 
old  ones.  A  creditor  of  one  of  the  old  companies,  on  the  strength 
of  the  "trust-fund"  doctrine,  claimed  a  lien  on  its  property  in  the 
hands  of  the  new  corporation.  If  this  property  was  impressed 
with  a  trust  in  favor  of  creditors  in  the  hands  of  the  old  company, 
it  would  logically  follow  that  it  would  continue  so  in  the  hands 
of  the  new  one.  But  the  court  denied  the  relief,  and,  in  giving  its 
construction  of  the  "trust-fund"  doctrine,  said :  "The  property  of 
a  corporation  is  doubtless  a  trust  fund  for  the  payment  of  its 
debts  in  the  sense  that  when  the  corporation  is  lawfully  dissolved, 
and  all  its  business  wound  up,  or  when  it  is  insolvent,  all  its  cred- 
itors are  entitled  in  equity  to  have  their  debts  paid  out  of  the  cor- 
porate property  before  any  distribution  thereof  among  stockhold- 
ers. It  is  also  true,  in  the  case  of  a  corporation  as  in  that  of  a 
natural  person,  that  any  conveyance  of  the  property  of  the  debtor 
without  authority  of  law  and  in  fraud  of  existing  creditors  is 
void  "  This  is  probably  what  is  meant  when  it  is  said  in  some 
cases,  as  in  Clark  v.  Bever,  139  U.  S.  no,  11  Sup.  Ct.  Rep. 
468,  that  the  capital  of  a  corporation  is  a  trust  fund  sub  modo. 
If  so,  no  one  will  dispute  it.  But  it  means  very  little,  for  the  same 
thing  could  be  truthfully  said  of  the  property  of  an  individual  or 
a  partnership.  And  obviously  it  would  make  no  difiference  whether 
the  disposition  of  the  corporate  property  is  to  a  stranger  or  to  a 
stockholder,  except  that,  of  course,  the  latter  could  not  be  an  in- 
nocent purchaser. 

There  is  also  much  confusion  in  regard  to  what  the  "trust-fund" 
doctrine  applies.  Some  cases  seem  to  hold  that  unpaid  subscribed 
capital  is  a  trust  fund,  while  other  assets  are  not — that  is,  so  long 
as  the  subscription  is  unpaid,  it  is  held  in  trust  by  the  corpora- 
tion, but,  when  once  paid  in,  it  ceases  to  be  a  trust  fund ;  while 
other  cases  hold  that,  paid  or  unpaid,  it  is  all  a  trust  fund.  The 
first  seems  to  be  the  rule  laid  down  in  Sawyer  v.  Hoag,  17  Wall. 
610,  in  which  the  "trust- fund"  doctrine  was  first  squarely  an- 
nounced by  that  court  with  all  the  vigor  and  force  characteristic 


HOSPES   V.    NORTHWESTERN    MANUFACTURING   &   CAR   CO.         243 

of  the  great  jurist  who  wrote  the  opinion.  In  that  case  a  stock- 
holder in  an  insurance  company  had  given  his  note,  as  the  court 
found  the  fact  to  be,  for  85  per  cent,  of  his  subscription  to  the 
stock  of  the  company.  After  the  company  had  become  bankrupt, 
and  the  stockholder  knew  the  fact,  he  bought  up  a  claim  against 
the  company  for  one-third  its  face,  and  in  a  suit  by  the  assignee 
in  bankruptcy  on  his  note  set  up  this  claim  as  an  offset.  That 
this  would  have  been  a  fraud  on  the  bankrupt  act,  and  at  least 
a  moral  fraud  on  policyholders,  is  quite  apparent  without  invok- 
ing the  "trust-fund"  doctrine;  and,  if  the  note  for  unpaid  stock 
was  a  trust  fund,  there  could  have  been  no  offset,  whether  the 
company  w^as  solvent  or  insolvent.  In  the  opinion  it  is  said  that, 
"if  the  subscription  had  been  paid  by  the  note  or  otherwise,  the 
note  ceased  thereby  to  be  a  trust  fund  to  which  creditors  can  look, 
and  becomes  ordinary  assets,  with  which  directors  may  deal  as 
they  choose."  But  in  Upton  v.  Tribilcock,  91  U.  S.  45,  it  is  stated: 
"The  capital  paid  in  and  promised  to  be  paid  in  is  a  fund  which 
the  trustees  cannot  squander  or  give  away."  While  in  Sanger  v. 
Upton,  id.  56,  it  is  said :  "When  debts  are  incurred  a  contract 
arises  with  the  creditors  that  it  [the  capital]  shall  not  be  with- 
drawn or  applied  otherwise  than  upon  their  demands  until  such 
demands  are  satisfied."  And  in  the  same  connection  it  is  distinctly 
stated  that  there  is  no  difference  between  assets  paid  in  and  sub- 
scriptions ;  that  "unpaid  stock  is  as  much  a  part  of  this  pledge  and 
as  much  a  part  of  the  assets  of  the  company  as  the  cash  which 
has  been  paid  in  upon  it.  Creditors  have  the  same  right  to  look 
to  it  as  to  anything  else,  and  the  same  right  to  insist  upon  its  pav- 
ment  as  upon  the  payment  of  any  other  debt  due  to  the  company. 
As  regards  creditors,  there  is  no  distinction  between  such  a  de- 
mand and  any  other  asset  which  may  form  a  part  of  the  property 
and  effects  of  the  corporation."  This  language  is  quoted  and  ap- 
proved in  County  of  ]\Iorgan  v.  Allen.  103  U.  S.  498.  508.  It 
would  seem  clear  that  this  is  the  correct  statement  of  the  law. 
The  capital  (not  the  mere  share  certificates)  means  all  the  assets, 
however  invested.  If  a  subscriber  gives  his  note  for  his  stock,  that 
note  is  no  more  and  no  less  a  trust  fund  than  the  money  would 
have  been  if  he  had  paid  cash  down.  Capital  cannot  change  from 
a  trust  to  not  a  trust  by  a  mere  change  of  form.  It  is  either  all 
a  trust  or  all  not  a  trust,  and  the  "trust-fund"  rule,  whatever  that 
be.  must  apply  to  all  alike,  and  in  the  same  way.  If  the  assets 
of  a  corporation  are  given  back  to  stockholders,  the  result  is  the 
same  as  if  the  shares  had  been  issued  wholly  or  partly  as  a  bonus. 
The  latter  is  merely  a  short  cut  to  the  same  result.  So  with  divi- 
dends paid  out  of  the  capital,  voluntary  conveyances,  stock  paid 
in  over-valued  property :  all  are  forms  of  one  and  the  same  thing, 
all  reaching  the  same  result  (a  disposition  of  corporate  assets), 
which  may  or  may  not  be  a  fraud  on  creditors,  depending  on  cir- 
cumstances. This  much  being  once  settled,  the  solution  of  the 
question   when   a   subsequent   creditor   can    insist    on    payment   of 


244     CAPITAL  stock:  herein  also  of  the  rights  of  creditors. 

stock  issued  as  paid  up,  but  not  in  fact  paid  for,  or  not  paid  for 
at  par,  becomes,  as  we  shall  presently  see,  comparatively  simple. 
Another  proposition  which  we  think  must  be  sound  is  that  cred- 
itors cannot  recover  on  the  ground  of  contract  when  the  corpora- 
tion could  not.    Their  right  to  recover  in  such  cases  must  rest  on 
the  ground  that  the  acts  of  the  stockholders  with  reference  to  the 
corporate   capital  constitutes  a   fraud  on  their  rights._     We  have 
here  a  case  where  the  contract  between  the  corporation  and  the 
takers  of  the  shares  was  specific  that  the  shares   should  not  be 
paid  for.     Therefore,  unlike  many  of  the  cases  cited,  there  is  no 
ground  for  implying  a  promise  to  pay  for  them.     The  parties  have 
explicitly  agreed  that  there  shall  be  no  such  implication  by  agree- 
ing that  the  stock  shall  not  be  paid  for.     In  such  a  case  the  cred- 
itors  undoubtedly   may   have   rights    superior   to   the   corporation, 
but   these   rights   cannot   rest   on  the   implication   that   the   share- 
holder agreed  to  do  something  directly  contrary  to  his  real  agree- 
ment, but  must  be  based  on  tort  or   fraud,  actual  or  presumed. 
In  England,  since  the  act  of   1867,  there  is  an  implied  contract 
created   by   statute   that   "every    share   in   any   company   shall  _  be 
deemed  and  be  taken  to  have  been  issued  and  to  be  held  subject 
to  the  payment  of  the  whole  amount  thereof  in  cash."     This  stat- 
utory contract  makes  every  contrary  contract  void.     Such  a  stat- 
ute would  be  entirely  just  to  all,  for  every  one  would  be  advised 
of  its  provisions,  and  could  conduct  himself  accordingly.     And  in 
view  of  the  fact  that  "watered"  and  "bonus"  stock  is  one  of  the 
greatest  abuses  connected  with  the  management  of  modern  cor- 
porations, such  a  law  might,  on  grounds  of  public  policy,  be  very 
desirable.     But  this  is  a  matter  for  the  legislature,  and  not  for  the 
courts.     We  have  no  such  statute;  and,  even  if  the  law  of  1873, 
under   which   the   car   company   was   organized,    impliedly    forbids 
the  issue  of  stock  not  paid  for,  the  result  might  be  that  such  issue 
would  be  void  as  ultra  vires,  and  might  be  canceled,  but  such  a 
prohibition  would  not  of  itself  be  sufficient  to  create  an  implied 
contract,  contrary  to  the  actual  one,  that  the  holder  should  pay 
for  his  stock. 

It  is  well  settled  that  an  equity  in  favor  of  a  creditor  does  not 
arise  absolutely  and  in  every  case  to  have  the  holder  of  "bonus" 
stock  pay  for  it  contrary  to  his  actual  contract  with  the  corpora- 
tion. Thus  no  such  equity  exists  in  favor  of  one  whose  debt  was 
contracted  prior  to  the  issue,  since  he  could  not  have  trusted  the 
company  upon  the  faith  of  such  stock.  First  Nat.  Bank  v.  Gustin 
Mm.  Co.,  42  Minn.  327,  44  N.  W.  Rep.  198;  Coit  v.  Amalga- 
mating Co.,  119  U.  S.  347.  7  Sup.  Ct.  Rep.  231;  Handley  v. 
Stutz,  139  U.  S.  435,  II  Sup.  Ct.  Rep.  530.  It  does  not  exist  m 
favor  of  a  subsequent  creditor  who  has  dealt  with  the  corporation 
with  full  knowledge  of  the  arrangement  by  which  the  "bonus" 
stock  was  issued,  for  a  man  cannot  be  defrauded  by  what  which 
he  knows  when  he  acts.  First  Nat.  Bank  v.  Gustin  etc.  Min. 
Co.,  supra.     It  has  also  been  held  not  to  exist  where  stock  has 


HOSPES  V.    NORTHWESTERN    MANUFACTURING   &    CAR   CO.         245 

been  issued  and  turned  out  at  its  full  market  value  to  pay  corpo- 
rate debts.  Clark  v.  Bever,  supra.  The  same  has  been  held  to  be 
the  case  where  an  active  corporation,  whose  original  capital  has 
been  impaired  for  the  purpose  of  recuperating  itself  issues  new 
stock,  and  sells  it  on  the  market  for  the  best  price  obtainable,  but 
for  less  than  par  (Handley  v.  Stutz,  supra)  ;  although  it  is  diffi- 
cult to  perceive,  in  the  absence  of  a  statute  authorizing  such  a 
thing  (of  which  every  one  dealing  with  the  corporations  is  bound 
to  take  notice),  any  difference  between  the  original  stock  of  a  new 
corporation  and  additional  stock  issued  by  a  "going  concern." 
It  is  difficult,  if  not  impossible,  to  explain  or  reconcile  these  cases 
upon  the  "trust-fund"  doctrine,  or,  in  the  light  of  them,  to  pred- 
icate the  liability  of  the  stockholder  upon  that  doctrine.  But  by 
putting  it  upon  the  ground  of  fraud,  and  applying  the  old  and 
familiar  rules  of  law  on  that  subject  to  the  peculiar  nature  of  a 
corporation  and  the  relation  which  its  stockholders  bear  to  it  and 
to  the  public,  we  have  at  once  rational  and  logical  ground  on 
which  to  stand.  The  capital  of  a  corporation  is  the  basis  of  its 
credit.  It  is  a  substitute  for  the  individual  liability  of  those  who 
own  its  stock.  People  deal  with  it  and  give  it  credit  on  the  faith 
of  it.  They  have  a  right  to  assume  that  it  has  paid  in  capital  to 
the  amount  which  it  represents  itself  as  having;  and  if  they  give 
it  credit  on  the  faith  of  that  representation  and  if  the  representa- 
tion is  false,  it  is  a  fraud  upon  them ;  and,  in  case  the  corporation 
becomes  insolvent,  the  law,  upon  the  plainest  principles  of  com- 
mon justice,  says  to  the  delinquent  stockholder,  "IMake  that  repre- 
sentation good  by  paying  for  your  stock."  It  certainly  cannot  re- 
quire the  invention  of  any  new  doctrine  in  order  to  enforce  so 
familiar  a  rule  of  equity.  It  is  the  misrepresentation  of  fact  in 
stating  the  amount  of  capital  to  be  greater  than  it  really  is  that  is 
the  true  basis  of  the  liability  of  the  stockholder  in  such  cases;  and 
it  follows  that  it  is  only  those  creditors  who  have  relied,  or  who 
can  fairly  be  presumed  to  have  relied,  upon  the  professed  amount 
of  capital,  in  whose  favor  the  law  will  recognize  and  enforce  an 
equity  against  the  holders  of  "bonus"  stock.  This  furnishes  a 
rational  and  uniform  rule,  to  which  familiar  principles  are  easily 
applied,  and  which  frees  the  subject  from  many  of  the  difficulties 
and  apparent  inconsistencies  into  which  the  "trust-fund"  doctrine 
has  involved  it;  and  we  think  that,  even  when  the  trust- fund  doc- 
trine has  been  invoked,  the  decision  in  almost  every  well-consid- 
ered case  is  readily  referable  to  such  a  rule. 

It  is  urged,  however,  that,  if  fraud  be  the  basis  of  the  stock- 
holders' liability  in  such  cases,  the  creditor  should  affirmatively 
allege  that  he  believed  that  the  bonus  stock  had  been  paid  for, 
and  represented  so  much  actual  capital,  and  that  he  gave  credit  to 
the  incorporation  on  the  faith  of  it ;  and  it  is  also  argued  that,  while 
there  may  be  a  presumption  to  that  effect  in  the  case  of  a  sub- 
sequent creditor,  this  is  a  mere  presumption  of  fact,  and  that  in 
pleadings  no  presumptions  of  fact  are  indulged  in.     This  position 


246      CAPITAL  stock:   HEREIN    ALSO  OF  THE  RIGHTS  OF   CREDITORS. 

is  very  plausible,  and  at  first  sight  would  seem  to  have  much  force ; 
but  we  think  it  is  unsound.  Certainly  any  such  rule  of  pleading 
or  proof  would  work  very  inequitably  in  practice.  Inasmuch  as 
the  capital  of  a  corporation  is  the  basis  of  its  credit,  its  financial 
standing  and  reputation  in  the  community  has  its  source  in,  and 
is  founded  upon,  the  amount  of  its  professed  and  supposed  capital, 
and  every  one  who  deals  with  it  does  so  upon  the  faith  of  that 
standing  and  reputation,  although,  as  a  matter  of  fact,  he  may 
have  no  personal  knowledge  of  the  amount  of  its  professed  capital, 
and  in  a  majority  of  cases  knows  nothing  about  the  shares  of 
stock  held  by  any  particular  stockholder,  or,  if  so,  what  was  paid 
for  them.  Hence,  in  a  suit  by  such  creditor  against  the  holders  of 
"bonus"  stock,  he  could  not  truthfully  allege,  and  could  not  affirm- 
atively prove,  that  he  believed  that  the  defendant's  stock  had  been 
paid  for,  and  that  he  gave  the  corporation  credit  on  the  faith  of 
it,  although,  as  a  matter  of  fact,  he  actually  gave  the  credit  on 
the  faith  of  the  financial  standing  of  the  corporation,  which  was 
based  upon  its  apparent  and  professed  amount  of  capital.  The 
misrepresentation  as  to  the  amount  of  capital  would  operate  as 
a  fraud  on  such  a  creditor  as  fully  and  effectually  as  if  he  had 
personal  knowledge  of  the  existence  of  the  defendants'  stock,  and 
believed  it  to  have  been  paid  for  when  he  gave  the  credit.  For 
this  reason,  among  others,  we  think  that  all  that  it  is  necessary  to 
allege  or  prove  in  that  regard  is  that  the  plaintiff  is  a  subsequent 
creditor;  and  that,  if  the  fact  was  that  he  dealt  with  the  corpora- 
tion with  knowledge  of  the  arrangement  by  which  the  "bonus" 
stock  was  issued,  this  is  a  matter  of  defense.  Gogebic  Inv.  Co.  v. 
Iron  Chief  Min.  Co.,  78  Wis.  427,  47  N.  W.  Rep.  726.  Counsel 
cites  Fogg  V.  Blair,  supra,  to  the  proposition  that  the  complaint 
should  have  stated  that  this  stock  had  some  value;  but  that  case 
is  not  in  point,  for  the  plaintiff  there  was  a  prior  creditor;  and 
as  his  debt  could  not  have  been  contracted  on  the  faith  of  stock 
not  then  issued,  he  could  only  maintain  his  action,  if  at  all,  by  al- 
leging that  the  corporation  parted  with  something  of  value. 

In  one  respect,  however,  we  think  the  complaint  is  clearly  insuffi- 
cient. The  thresher  company  is  here  asking  the  interposition  of 
the  court  to  aid  in  enforcing  an  equity  in  favor  of  creditors  against 
the  stockholders  by  declaring  them  liable  to  pay  for  this  stock  con- 
trary to  their  actual  contract  with  the  corporation.  While  the 
proceeding  is  not,  strictly  speaking,  an  equitable  action,  yet  the 
relief  asked  is  equitable  in  its  nature.  Under  such  circumstances, 
it  was  incumbent  upon  the  thresher  company  to  show  its  own 
equities,  and  that  it  was  in  a  position  to  demand  such  relief.  It 
was  not  the  original  creditor  of  the  car  company,  but  the  assignee 
of  the  original  creditors.  By  that  purchase  it,  of  course,  succeeded 
to  whatever  strictly  legal  rights  its  assignors  had ;  but  it  is  not 
rights  of  that  kind  which  it  is  here  seeking  to  enforce.  Under 
such  circumstances,  we  think  it  was  incumbent  upon  it  to  state 
what  it  paid  for  the  claims,  or  at  least  to  show  that  it  paid  a  sub- 


HOSPES  V.    NORTHWESTERN    MANUFACTURING   &   CAR   CO.         247 

stantial,  and  not  a  mere  nominal,  consideration.  The  only  allega- 
tion is  that  it  paid  "a  valuable  consideration."  This  might  have 
been  only  one  dollar.  It  appears  that  it  bought  the  claims  after 
the  car  company  had  become  insolvent,  and  its  affairs  were  in  the 
hands  of  a  receiver ;  also  that  the  indebtedness  of  that  company 
amounted  to  about  $3,000,000,  and  that  there  were  not  corporate 
assets  enough  to  pay  any  considerable  part  of  it.  The  mere  chance 
of  collecting  something  out  of  the  stockholders  does  not  ordinarily 
much  enhance  the  selling  price  of  claims  against  an  insolvent  cor- 
poration. If  any  person  or  company  had  gone  to  work  and  bought 
up  for  a  mere  song  this  large  indebtedness  of  the  car  company  for 
the  purpose  of  speculating  on  the  liability  of  the  stockholders,  no 
court  would  grant  them  the  relief  here  prayed  for.  It  would  say 
to  them,  "We  will  not  create  and  enforce  an  equity  for  the  benefit 
of  any  such  speculation."  Counsel  for  respondent  suggests  that 
the  thresher  company  is  but  an  organization  of  the  original  cred- 
itors, who  formed  it,  and  pooled  their  claims,  so  as  to  save  some- 
thing out  of  the  wreck  of  the  car  company;  but  nothing  of  the 
kind  is  alleged.  On  this  ground  the  demurrer  should  have  been 
sustained. 

In  view  of  further  proceedings  it  may  be  proper  to  say  that  in 
our  opinion  there  is  nothing  in  the  position  that  the  right  of 
recovery  against  the  stockholders  was  barred  by  the  statute  of 
limitation.  The  argument  in  support  of  the  proposition  all  rests 
upon  the  false  premise  that  the  cause  of  action  accrued  in  May. 
1882,  when  the  bonus  stock  was  issued.  The  corporation  never 
had  any  cause  of  action  against  these  defendants.  As  between 
them  and  the  company,  the  agreement  for  the  issue  of  the  stock 
was  valid.  The  creditors  are  not  here  seeking  to  enforce  a  right 
of  action,  acquired  through  or  from  the  corporation,  but  one  that 
accrued  directly  to  themselves,  or  for  their  benefit,  and  that  did 
not  accrue  at  least  until  the  corporation  became  insolvent,  in  May, 
1884. 

Counsel  for  the  St.  Paul  Trust  Company  stated  that,  if  the  court 
should  reverse  the  order  appealed  from  on  any  of  the  grounds 
urged  by  the  other  appellants,  it  would  not  be  necessary  for  us  to 
consider  any  of  the  assignments  of  error  peculiar  to  his  appeal ; 
but,  as  we  reverse  upon  a  ground  that  may  be  remedied  by  amend- 
ment, we  deem  it  proper  to  say  that,  in  our  opinion,  the  claim 
against  the  Kittson  estate  is  a  "contingent"  claim,  within  the 
meaning  of  Gen.  St.   1878,  c.  53. 

Order  reversed. 


CHAPTER  XL 

STOCK     SUBSCRIPTIONS. 

BRYANT'S  POND  STEAM-MILL  CO.  v.  FELT. 

1895.  87  Maine,  234,  32  Atl.  888,  33  L.  R.  A.  593,  47  Am.  St.  323. 

Nature  of  Subscription  Contract. 

WALTON,  J.  *  *  *  The  only  question  we  find  it  necessary 
to  consider  is  whether  a  subscriber  to  the  capital  stock  of  an  un- 
organized corporation  has  a  right  to  withdraw  from  the  enterprise, 
provided  he  exercises  the  right  before  the  corporation  is  organized 
and  his  subscription  is  accepted.  We  think  he  has.  Such  a  sub- 
scription is  not  a  completed  contract.  It  takes  two  parties  to 
make  a  contract.  A  non-existing  corporation  can  no  more  make 
a  contract  for  the  sale  of  its  stock  than  an  unbegotten  child  can 
make  a  contract  for  the  purchase  of  it. 

The  right  of  subscribers  to  the  capital  stock  of  a  proposed  cor- 
poration to  withdraw  their  subscriptions  at  any  time  before  the 
organization  of  the  corporation  is  completed  has  been  affirmed  in 
several  recent  and  well  considered  opinions.  The  right  rests  upon 
the  impregnable  ground  of  the  legal  impossibility  of  completing 
a  contract  between  two  parties,  only  one  of  which  is  in  existence. 
There  can  be  no  meeting  of  the  minds  of  the  parties.  There  can 
be  no  acceptance  of  the  subscriber's  proposition  to  become  a  stock- 
holder. There  can  be  no  mutuality  of  rights  or  obligations.  There 
can  be  no  consideration  for  the  subscriber's  promise.  As  said  in 
one  of  our  own  decisions,  it  is  a  mere  nudum  pactum — a  promise 
without  a  promisee — a  contractor  without  a  contractee.  In  fact, 
every  element  of  a  binding  contract  is  wanting.  If  the  subscriber's 
promise  to  take  and  pay  for  shares  remains  unrevoked  till  the 
organization  of  the  proposed  corporation  is  efifected,  and  his  prom- 
ise has  been  accepted,  then  we  have  all  the  elements  of  a  valid 
contract :  competent  parties ;  mutuality  of  duties  and  obligations ; 
a  valid  consideration,  the  promise  of  one  party  being  a  sufficient 
consideration  for  the  promise  of  the  other;  a  promise  as  well 
as  a  promisor;  a  contractee  as  well  as  a  contractor.  In  fact,  all 
the  elements  of  a  valid  contract  are  present,  and  the  subscription 
has  become  binding  upon  both  of  the  parties.  But,  till  the  cor- 
poration has  come  into  existence,  all  these  elements  are  necessarily 
wanting,  and  the  subscriber's  promise  amounts  to  no  more  than 
an  offer,  which,  like  all  mere  offers,  may  be  withdrawn  at  any 
time  before  acceptance.  When  accepted,  it  becomes  binding.  Till 
accepted,  it  remains  revocable.     *     *     * 

248 


NORWICH    LOCK    MFG.    CO.    V.    HOCKADAY.  249 

In  Hudson  Real  Estate  Co.  v.  Tower,  156  Mass.  82  (1892),  the 
action  was  founded  on  a  subscription  to  the  capital  stock  of  an 
unorganized  corporation,  and  the  defense  was  based  on  an  alleged 
withdrawal  of  the  subscription.  The  right  to  withdraw  was  con- 
troverted. The  court  held  that  at  the  time  when  the  defendant 
signed  the  subscription  paper  declared  on,  it  was  not  a  contract, 
for  want  of  a  contracting  party  on  the  other  side ;  that  which  such 
a  subscription  may  become  a  contract  after  the  corporation  has 
been  organized,  still,  until  the  organization  is  effected,  and  the 
subscription  is  accepted,  it  is  a  mere  proposition  or  offer,  which 
may  be  withdrawn,  like  any  other  unaccepted  proposition  or  offer. 

It  is  urged  by  the  counsel  for  the  plaintiff  corporation  that  such 
subscriptions  create  binding  and  enforceable  contracts  between  the 
subscribers  themselves,  and  are  therefore  irrevocable,  except  with 
the  consent  of  all  the  subscribers;  and  some  of  the  authorities 
cited  by  him  seem  to  sustain  that  view.  But  we  find,  on  examina- 
tion, that  such  views,  when  expressed,  are  in  most  cases  mere 
dicta,  and  that  the  cases  are  very  few  in  which  such  a  doctrine  has 
been  acted  upon.  Reason  and  the  weight  of  authority  are  opposed 
to  such  a  view.  Of  course,  subscription  papers  may  be  so  worded 
as  to  create  binding  contracts  between  the  subscribers  themselves. 
But  we  are  not  now  speaking  of  such  subscriptions;  or  of  volun- 
tary and  gratuitous  subscriptions  to  public  or  charitable  objects, 
which,  when  accepted  and  acted  upon,  become  binding.  We  are 
now  speaking  only  of  subscriptions  to  the  capital  stock  of  pro- 
posed business  corporations.  With  regard  to  such  subscriptions, 
we  regard  it  as  settled  law  that  they  do  not  become  binding  upon 
the  subscribers  till  the  corporations  have  been  organized  and  the 
subscriptions  accepted;  and  that,  till  then,  the  subscribers  have  a 
right  to  revoke  their  subscriptions.     *     ■"     "" 

Judgment  for  defendant.^ 


*     * 


NORWICH  LOCK  MFG.  CO.  v.  HOCKADAY. 

1893.    89  Ya.  557,  16  S.  E.  877. 

Effect  of  Change  in  Corporate  Enterprise  Upon  Liability  of 

Subscriber. 

Error  to  judgment  of  the  hustings  court  for  the  city  of  Roa- 
noke, rendered  March  14,  1892,  on  a  motion  for  judgment  for 
money  on  contract,  wherein  the  Norwich  Lock  Manufacturing 
Company,  of  Roanoke.  Va.,  was  plaintiff,  and  J.  R.  Hockaday 
was  defendant.    The  judgment  being  adverse  to  the  plaintiff  com- 

"See  also,  Athol  Music  Hall  Co.  v.  Carey  (1875),  116  Mass.  471. 
Compare  Avon  Springs  Sanitarium  Co.  v.  Weed  (1907),  119  App.  Div. 
(N  Y.)  560,  105  N.  Y.  S.  1106,  reversed  on  dissenting  opinion  below 
in  189  N.  Y.  557.— Ed. 


250  STOCK    SUBSCRIPTIONS. 

pany  it  obtained  a  writ  of  error  to  this  court.     Opinion  states  the 
case. 

FAUNTLEROY,  J.,  delivered  the  opinion  of  the  court. 

The  record  discloses  that  about  February  i,  1891,  a  paper 
headed  "A  New  and  Important  Industry  for  Roanoke"  was  cir- 
culated for  signatures.  It  proceeds :  "It  is  proposed  to  organize 
a  company  for  the  purpose  of  manufacturing  locks,  bolts,  and  all 
house  hardware,  and  other  articles  of  a  similar  character.  The 
capital  stock  of  the  company  will  be  from  $350,000  to  $400,000. 
An  existing  plant  can  be  purchased  at  a  proper  valuation,  and  can 
be  moved  immediately  to  Roanoke.  It  would,  at  Roanoke,  have 
a  decided  advantage  over  its  present  location.  There  can  be  no 
question  that  securing  this  manufacturing  plant  for  Roanoke  will 
be  the  greatest  step,"  etc. 

The  conclusion  was :  "We  *  *  *  hereby  subscribe  the 
amount  set  opposite  our  names,  respectively,  to  the  capital  stock 
of  the  company  to  be  formed  in  accordance  with  the  provisions 
.of  the  foregoing  prospectus."  *  *  *  'po  t'j^jg  prospectus,  or 
subscription  list,  is  subscribed  the  name  of  "J.  R.  Hockaday  and 
others"   (opposite),  $1,500. 

The  entire  amount  subscribed  to  this  paper  was  less  than  the 
proposed  minimum  of  capital  stock,  and  no  company  has  been 
formed  in  accordance  with  the  provisions  of  the  aforesaid  pros- 
pectus. Two  months  and  more  later,  a  paper,  dated  April  25, 
1891,  was  circulated  for  signatures,  headed  like  the  first,  and  pro- 
ceeding: "An  agreement  has  been  made  with  a  hardware  manu- 
factory in  the  North  to  sell  its  plant,  etc.  The  stockholders  of  the 
company  in  the  North  have  subscribed  $200,000  to  the  company 
that  is  to  be  located  on  the  property  of  the  Roanoke  Development 
Company,  and  the  Roanoke  Development  Company  has  subscribed 
$75,000.  The  remaining  $75,000  must  be  subscribed  in  order  to 
secure  the  industry.  The  R.  D.  Company  agree  to  donate  a  suit- 
able site  for  the  industry,  for  which  full  paid-up  stock  shall  be 
issued,  which  stock  the  R.  D.  Co.  agrees  to  donate  to  the  com- 
pany." 

This  prospectus  paper  concludes:  "We,  the  undersigned,  each, 
in  consideration  of  the  subscriptions  of  the  others  hereto,  and  the 
above  agreement  by  the  Roanoke  Development  Company,  hereby 
subscribe  the  amount  set  opposite  our  names,  respectively,  to  the 
capital  stock  of  the  company  to  be  formed  in  accordance  with  the 
provisions  of  the  foregoing  prospectus,"  etc.  The  name  of  J.  R. 
Hockaday,  or  "J.  R.  Hockaday  and  others,"  is  not  among  the 
names  of  the  subscribers  to  the  capital  stock  under  this  subscrip- 
tion list  or  prospectus ;  and  the  fact  in  the  record  is  that  J.  R. 
Hockaday  was  approached  and  asked  to  subscribe  under  this  sec- 
ond prospectus,  and  he  positively  and  pointedly  refused  to  sub- 
scribe, saying  that  it  was  a  different  contract  and  scheme  from 
the  first.     Under  this  second  prospectus  the  lock  manufacturing 


NORWICH    LOCK    MFG.    CO.    V.    HOCKADAY.  25 1 

plant  was  not  to  be  located  in  or  at  Roanoke  City  (as  it  expressly 
was  in  the  first  prospectus),  but  to  be  put  beyond  the  city  limits, 
on  the  opposite  side  of  the  river,  and  on  the  lands  of  the  Roanoke 
Development  Company,  in  the  county  of  Roanoke,  where  its  prin- 
cipal office  was  to  be  located.  The  charter  under  which  the  plain- 
tiff company  was  organized  was  granted  by  the  judge  of  the  cir- 
cuit court  of  Roanoke  county  May  21,  1891,  upon  the  presentation 
and  provisions  of  a  paper  dated  May  11,  189 1,  and  signed  by 
Arthur  C.  Denniston,  Edw.  C.  Pechin,  Arthington  Gilpin,  S.  W. 
Jamison  and  P.  L.  Terry,  purporting  to  be  their  agreement  to  be- 
come a  corporation  by  the  name  of  the  "Norwich  Lock  Manu- 
facturing Company,  of  Roanoke,  Virginia,"  for  the  purpose  of 
manufacturing,  dealing  in,  and  selling  locks,  etc.,  and  other  articles 
of  house  hardware,  and  all  other  articles  composed  of  iron,  wood 
and  other  substances ;  of  erecting  and  conducting  all  buildings  and 
structures,  and  the  machinery  and  appliances  and  fixtures  incident 
thereto ;  of  acquiring,  holding  and  selling  iron  and  other  metals, 
wood  and  other  substances ;  of  acquiring  and  disposing  of  mineral 
and  other  lands  in  fee,  timber  and  timber  rights,  water  and  water- 
power  and  privileges,  etc.,  as  may  be  convenient  for  the  business 
of  the  company;  of  erecting  houses,  etc.,  for  the  purposes  of  its 
business ;  of  making  and  using  all  roads,  etc.,  with  power  to  bor- 
row money,  and  create,  issue  and  sell  or  dispose  of  its  bonds,  and 
to  secure  the  same  by  deed  of  trust,  etc.  The  minimum  capital 
to  be  $350,000,  the  maximum  $500,000.  The  county  of  Roanoke 
to  be  the  place  where  the  principal  office  of  the  company  is  to  be 
kept. 

The  Norwich  Lock  Manufacturing  Company,  the  plaintiff  in 
this  suit,  which  was  organized,  under  the  foregoing  charter,  Aug- 
ust 4,  1 891,  was  not  formed  in  accordance  with  the  provisions  of 
the  prospectus  or  subscription  paper  on  which  the  defendant, 
Hockaday,  subscribed,  but  differs  therefrom,  radically  and  mate- 
rially, in  essential  general  object  and  purpose,  as  well  as  in  special 
details,  powers,  and  provisions. 

The  location,  which  was,  by  the  subscription  paper  which  the 
defendant,  Hockaday.  signed,  in  February,  1891,  to  be  immediately 
placed  in  the  city  of  Roanoke,  is  by  the  charter,  and  terms  and 
agreement  with  the  Roanoke  Development  Company,  to  be  on  the 
lands  of  that  company,  lying  extensively  on  the  opposite  side  of 
the  Roanoke  river,  outside  of  the  limits  of  Roanoke  City,  and  in 
the  county  of  Roanoke.  The  maximum  capital  stock,  which  was 
to  be  $400,000,  is,  by  the  prospectus  which  Hockaday  expressly 
refused  to  sign  or  to  recognize,  and  by  the  charter  under  which 
the  plaintiff  company  long  subsequently  organized,  put  at  $500,000. 
And  the  purposes  and  powers  of  the  company,  as  set  forth  in  the 
prospectus  and  the  charter  under  which  they  organized,  are  wholly 
and  essentially  different,  embracing  almost  any  and  every  indus- 
trial and  speculative  enterprise,  whilst  those  specified  and  em- 
braced in  the  prospectus  or  subscription  signed  by  the  defendant. 


252  STOCK    SUBSCRIPTIONS. 

Hockaday,  and  others,  are,  carefully  and  guardedly,  expressly  lim- 
ited to  the  "purpose  of  manufacturing  locks,  bolts,  and  all  house 
hardware,  and  other  articles  of  a  similar  character." 

The  subscription  list  which  J.  R,  Hockaday  and  others  signed 
in  February,  1891,  shows  that  the  total  amount  of  stock  subscribed 
for,  up  to  the  day  of  the  trial,  was  less,  by  $20,900,  than  the 
minimum  capital  stated  in  the  prospectus  or  subscription  contract 
signed  by  "Hockaday  and  others."  There  is  no  evidence  in  the 
record  that  the  defendant,  Hockaday,  ever  signed  any  but  the 
subscription  paper  circulated  in  February,  1891 ;  that  he  ever  at- 
tended or  heard  of  any  meeting  of  stockholders,  or  paid  any  part 
of  his  conditional  subscription,  or  expressly  or  impliedly  promised 
to  do  so,  or  knew  of  or  in  any  way  acquiesced  in  the  wide  and 
material  variances  between  the  charter  and  the  paper  which  he 
had  signed;  while  it  is  explicitly  in  evidence  that  he  refused  to 
sign,  or  in  any  way  recognize,  the  paper  which  was  substituted 
therefor,  and  sued  upon  in  this  case. 

After  the  evidence  was  all  in,  the  court,  on  motion  of  the  de- 
fendant, instructed  the  jury  "that  the  contract  of  subscription 
signed  by  the  defendant,  and  proven  in  this  case,  is  conditional 
upon  the  due  organization  of  a  company  under  and  by  virtue  of 
said  contract,  and  in  accordance  with  the  provisions  thereof;  and 
that  the  Norwich  Lock  Manufacturing  Company,  of  Roanoke, 
chartered  by  the  Hon.  Henry  E.  Blair,  judge  of  the  circuit  court 
of  Roanoke  county,  Virginia,  and  introduced  in  evidence,  is  not 
such  a  company  as  is  contemplated  by  and  provided  for  in  said 
contract.  That  the  contract  of  subscription  by  the  defendant 
proven  in  this  case  is  a  conditional  one — conditioned  upon  the  or- 
ganization of  a  company  under  and  in  accordance  with  the  provi- 
sions of  the  said  contract;  and  if  they  believe,  from  the  evidence, 
that  the  plaintiff  company  was  not  organized  under  said  contract 
and  in  accordance  therewith,  they  must  find   for  the  defendant." 

The  jury  did  find  for  the  defendant,  and  the  court  refused  to 
set  the  verdict  aside,  and  entered  judgment  accordingly. 

Upon  the  facts  in  the  case  we  can  conceive  of  no  instructions 
more  proper,  and  less  calculated  to  mislead  the  jury,  than  those 
given  in  this  case.  It  is  indisputably  the  province  and  the  duty 
of  the  court  to  construe  and  instruct  the  jury  as  to  the  legal  effect 
of  all  written  instruments  which  are  the  subject  of  the  contro- 
versy and  the  bases  of  the  suit;  and  the  court  only  exercised  its 
legitimate  function  in  comparing  the  subscription  paper  and  the 
charter  of  the  company  under  which  they  organized,  and  telling 
the  jury  that  the  latter  was  not,  in  legal  effect,  in  accordance  with 
the  provisions  of  the  former;  that  the  plaintiff,  Norwich  Lock 
Manufacturing  Company,  was  not  such  a  company,  nor  the  com- 
pany, contemplated  by  and  provided  for  in  the  subscription  con- 
tract signed  by  the  defendant.  The  charter,  and  the  prospectus 
under  which  they  organized,  and  to  which  the  defendant  positively 
refused  to  accede  or  consent,  differ  from  the  mere  subscription  list 


NORWICH    LOCK    MFG.    CO.   V.    HOCKADAY.  253 

signed  by  the  defendant,  as  to  the  location,  the  maximum  capital, 
and  the  objects  and  scope  of  the  enterprise;  and  the  company  pro- 
posed to  be  formed,  to  whose  capital  stock  he  conditionally  sub- 
scribed, was  never  formed. 

There  is  no  question  in  this  case  of  amendments  to  the  char- 
ter, whether  material  or  immaterial.  The  prospectus  to  which 
the  defendant  subscribed  his  name,  conditionally,  was  substituted 
by  another  and  a  radically  different  prospectus  (to  which  he  re- 
fused to  subscribe),  and  by  agreement  and  arrangement  between 
parties  with  whom  he  had  no  privity;  and  the  substitution  and 
changes  made  in  the  schemes  and  scope  of  the  enterprise  were 
made  before  the  charter  was  granted  or  applied  for.  _  If,  after 
one  has  signed  a  contract  agreeing  to  form  a  corporation  for  a 
named  purpose,  such  contract  is  changed  in  any  way,  before  the 
incorporation,  without  such  subscriber's  consent,  he  is  not  bound, 
because  the  company  formed  is  not  the  company  he  subscribed 
to.  I  Lawson  R.  R.  &  P.,  sec.  441 ;  Dorris  v.  Sweeney,  60  N.  Y. 
463;  Dutchess,  etc.,  v.  Mofifett,  58  N.  Y.  397;  Southern  Hotel 
Co.  V.  Newman,  30  Mo.  118;  Richmond  Fac.  Asso.  v.  Clarke,  61 
Maine,  351;  Mohan  v.  Wood,  44  Cal.  462. 

In  I  Lawson  R.  R.  and  P.,  section  435,  p.  'j'j'j,  it  is  said:  "One 
who  signs  a  mere  subscription  paper,  agreeing  to  take  a  number 
of  shares  in  a  corporation  to  be  formed,  is  not  liable  therefor  after 
the  formation  of  the  company,"  where  the  company  is  formed 
not  in  accordance  with  the  provisions  of  the  subscription  paper. 
"One  who  signed,  with  others,  a  subscription  paper,  promising  to 
take  and  pay  for  shares  in  a  joint-stock  association  to  build  a 
hotel,  most  of  which  subscribers  were  afterwards  incorporated, 
but  the  defendant  was  not  one  of  them,  is  not  bound,  by  his  sub- 
scription, to  pay  for  his  shares  to  the  corporation,  there  being 
no  privity  of  contract."  Machias  Hotel  Company  v.  Coyle,  58 
Am.  Dec.  712;  Mount  Sterling  Coal-Yard  Company  v.  Little,  16 
Bush.  429. 

As  before  said,  there  is  no  question  in  this  case  of  amendments 
to  charter;  but,  even  after  a  corporation  has  been  organized  under 
its  charter,  its  charter  cannot  be  materially  amended,  to  bind  a 
stockholder,  without  his  consent.  To  vary  the  route  of  a  railroad, 
shortening  the  line,  allowing  business  to  be  commenced  before  the 
full  capital  stock  is  subscribed,  are  instances  of  material  changes 
which  will  release  a  stockholder.  See  note  i.  sec.  500,  p.  518, 
Cook  on  Corporations.  To  superadd  a  new  and  different  business 
to  the  original  undertaking  will  work  a  dissolution  of  the  con- 
tract.    Clearwater  v.  Meredith,  i  Wall.  40. 

In  Fry's  Executor  v.  Lexington  &  Co.,  2  Metcalf  (Ky.),  314, 
the  court  said:  "Each  stockholder  has  a  right  to  insist  on  the 
prosecution  of  the  particular  objects  of  the  charter."  The  stock- 
holder may  say:  "I  have  agreed  to  become  interested,  and  have 
contracted,  in  view  of  the  profits  expected,  and  the  perils  and 
losses   incident  to   that   description   of  business;  but   I   have   not 


254  STOCK    SUBSCRIPTIONS. 

agreed  that  those  to  be  intrusted  with  the  capital  I  contributed 
shall  have  power  to  use  it  in  a  business  of  a  different  character, 
and  attended  with  hazards  of  a  different  description."  Marietta, 
etc.,  R.  R.  Co.  V.  Elliott,  lo  Ohio  St.  Rep.  57  (1859);  Ashton  v. 
Burbank,  2  Dill.  435   (1873). 

There  is  no  evidence,  or  even  a  contention,  that  the  defendant 
ever  signed  any  subscription  paper  but  the  prospectus  or  sub- 
scription list  No.  I,  in  February,  1891,  which  was  abandoned  and 
substituted  by  the  prospectus  and  agreement  dated  May  11,  1891 ; 
that  he  ever  attended  or  heard  of  any  meeting  of  stockholders,  or 
paid  any  part  of  his  alleged  subscription,  or  expressly  or  impliedly 
promised  to  do  so,  or  in  any  way  acquiesced  in  the  variances  be- 
tween the  charter  and  the  paper  he  had  signed;  but  there  is  un- 
denied  evidence  that  he  positively  refused  to  sign  the  paper  which 
was  substituted  therefor.  And  the  record  plainly  shows  that  there 
was  in  evidence  before  the  jury  the  all-sufficient  defense  against 
the  plaintiff's  claim — viz.,  that,  up  to  the  trial,  the  plaintiff  com- 
pany had  failed  to  obtain  subscriptions  to  the  extent  of  even  its 
minimum  of  capital  stock;  and,  therefore,  it  could  not  lawfully 
hold  the  defendant  liable  for  his  mere  conditional  subscription, 
even  though  the  scheme  and  scope  of  the  business  proposed  in  the 
first  prospectus  had  not  been  radically  and  essentially  changed  and 
enlarged  by  the  second  and  substituted  prospectus,  to  which  de- 
fendant was  not  a  party  or  privy.  Cook  on  Corp.,  sec.  176,  says : 
"It  is  an  implied  part  of  a  contract  of  subscription  that  the  con- 
tract is  to  be  binding  and  enforceable  against  the  subscriber  only 
after  the  full  capital  stock  of  the  corporation  has  been  subscribed." 
He  cannot  be  even  liable  to  assessment  unless  and  until  the  pro- 
posed capital  stock  of  the  company  has  been  fully  subscribed, 
unless  there  is  a  contrary  provision  in  the  article,  or  in  the  general 
law  under  which  the  corporation  is  formed,  i  Lawson  R.  R.  and 
P.,  sec.  439,  p.  733;  Morawetz  on  Corp.,  sec.  259. 

The  rule  of  the  Code  of  1887,  sec.  3484,  applied  to  the  evi- 
dence certified  in  this  record,  requires  that  the  verdict  of  the  jury, 
which  is  fully  warranted  by  the  facts  and  the  law,  and  the  judg- 
ment of  the  court  thereon,  should  be  affirmed. 

Judgment  affirmed. 


CALIFORNIA   SOUTHERN    HOTEL   CO.   v.   CALLENDER. 

1892.     94  Cal.  120,  29  Pac.  859,  28  Am.  St.  99. 

Subscription    to    Stock — Conditional    Subscription — Waiver — Issu- 
ance  of   Certificate — Calls. 

VANCLIEF,  C. :  The  plaintiff  is  a  California  corporation,  to 
whose  capital  stock  the  defendant  subscribed  $5,000  before  its 
organization,  that  being  50  shares  of  the  1,000  shares  into  which 


CALIFORNIA    SOUTHERN    HOTEL    CO.    V.    CALLENDER.  255 

the  capital  stock  of  $100,000  was  divided.  After  having  paid 
$2,000  of  this  subscription,  the  defendant  refused  to  pay  any  part 
of  the  remainder,  and  this  action  was  brought  to  recover  from 
him  the  remaining  $3,000.  The  cause  was  tried  by  the  court,  and 
judgment  was  given  in  favor  of  the  plaintiff  for  the  sum  de- 
manded. The  defendant  appeals  from  the  judgment  on  the  judg- 
ment roll,  without  bill  of  exceptions,  and  contends  that  upon  the 
findings  of  fact  the  judgment  should  have  been  given  for  the 
defendant.  The  following  is  a  copy  of  the  written  agreement  to 
and  upon  which  defendant  subscribed  for  the  stock:  "We,  the 
undersigned,  do  hereby  agree  to  and  with  each  other  that  we  will 
organize  and  form  a  corporation,  under  the  laws  of  the  state  of 
California,  for  the  purpose  of  erecting,  building,  and  owning  an 
hotel  building  in  the  city  of  San  Luis  Obispo,  county  of  San 
Luis  Obispo,  state  of  California,  and  for  the  purpose  of  purchas- 
ing and  owning  all  such  real  and  personal  property  as  may  be 
necessary  to  be  used  in  connection  with  said  hotel  building;  and 
we  agree  that  the  capital  stock  of  said  corporation  shall  be  one 
hundred  thousand  ($100,000)  dollars,  divided  into  one  thousand 
(1,000)  shares,  at  the  par  value  of  one  hundred  dollars  each;  and 
we  agree  to  and  with  each  other  that  we  do  respectively  subscribe 
for  the  number  of  shares  of  the  stock  of  said  corporation  as  are 
set  after  our  respective  names,  and  that  we  will  pay  for  the  same 
the  said  par  value  thereof  at  such  times  and  in  such  manner  as 
may  be  determined  by  the  board  of  directors  of  the  said  corpora- 
tion, to  be  hereafter  chosen.  And  we  further  agree  that  whenever 
seventy  thousand  ($70,000)  dollars  of  said  capital  stock  has  been 
subscribed  for,  a  meeting  shall  be  called  for  the  purpose  of  elect- 
ing a  board  of  directors,  and  taking  such  steps  as  are  required 
by  law  to  form  the  said  corporation,  and  that  at  such  meeting  the 
owners  of  a  majority  of  said  subscribed  stock  shall  constitute  a 
quorum,  and  are  authorized  to  elect  said  board  of  directors,  and 
transact  any  business  necessary  to  fully  complete  the  organization 
of  the  said  corporation.  That  the  number  of  directors  and  the 
term  of  said  corporation  shall  be  determined  at  such  meeting." 
Here  follows  the  list  of  subscribers,  among  whom  is  the  defendant 
for  "fifty  shares — $5,000."  These  subscriptions  amounted  to  'j'j2 
shares.  Among  them  was  one  of  the  Pacific  Coast  Steamship 
Company  and  Pacific  Coast  Railway  Company  for  100  shares, 
payable  in  freightage.  This  subscription  purports  to  have  been 
made  through  the  agency  of  Goodall,  Perkins  &  Co.  Another  of 
the  subscriptions  is  hy  Edwin  Goodall  for  125  shares,  partly  paya- 
ble in  a  block  of  land,  if  accepted  by  the  company,  estimated  at 
$7,500.  and  the  balance  of  $5,000  in  cash.  The  court  finds  that 
Goodall,  Perkins  &  Co.  were  not  authorized  to  subscribe  for  the 
steamship  and  railway  companies,  but  that  the  subscriptions  of 
these  companies,  and  also  that  of  Edwin  Goodall.  entered  into  the 
computation,  and  constituted  a  part  of  the  772  shares  subscribed 
before   the   organization   of   the   corporation.     The   court    further 


256  STOCK    SUBSCRIPTIONS. 

found  that  the  corporation  was  organized  on  August  17,  1887, 
and  that  the  articles  of  incorporation  included  as  subscribers  the 
name  of  the  Pacific  Coast  Steamship  Company  for  100  shares, 
amounting  to  $10,000,  and  that  of  Edwin  Goodall  for  125  shares, 
amounting  to  $12,500,  without  conditions;  and  further  found  "that 
at  the  preliminary  meeting  of  stockholders,  held  for  the  purpose 
of  considering  whether  or  not  the  incorporation  aforesaid  should 
be  organized  and  formed,  defendant  was  not  present,  and  did  not 
vote  for  the  shares  subscribed  for  by  him  as  aforesaid,  and  did 
not  acquiesce  in  or  agree  that  the  incorporation  should  be  formed 
on  the  subscription  aforesaid.  *  *  *  That  Edwin  Goodall,  for 
himself  and  for  the  Pacific  Coast  Steamship  Company,  united  in 
the  call  for  the  meeting  of  the  stockholders  last  aforesaid,  and 
each  were  represented  at  said  meeting  to  the  full  amount  of  the 
stock  subscribed  for  by  them  as  aforesaid  by  Edwin  Goodall,  and 
he  voted  and  acted  at  said  meeting  for  the  full  amount  of  the 
stock  subscribed  for  by  them,  viz.,  225  shares  of  the  value  of 
$22,500;  and  each  has  ever  since  the  incorporation  of  the  plaintiff 
been,  and  now  is,  a  stockholder  in  said  corporation  for  the  full 
value  and  amount  of  the  stock  aforesaid  subscribed  by  him."  And 
further  that  the  subscriptions  of  the  steamship  company  and 
Goodall  were  accepted  and  acted  upon  by  plaintiff,  and  have  been 
fully  paid  to  the  company.  And  further  found  that  "defendant 
has  at  all  times  recognized  the  validity  of  the  corporation  afore- 
said by  paying  $2,000  of  said  original  subscription  of  $5,000,  and 
not  otherwise,  and  has  never  dissented  from  or  protested  against 
any  of  its  acts.  That  defendant  has,  since  said  corporation  was 
formed,  acquiesced  in  the  building  of  the  hotel  mentioned  in  said 
agreement,  and  furnishing  the  same,  and  the  incurring  of  debts 
and  expenditures  of  money  therefor,  by  paying  said  $2,000  of  said 
subscription  to  said  corporation,  and  not  otherwise.  *  *  *  That 
a  large  indebtedness  has  been  incurred  by  plaintiff,  and  large  sums 
of  money  expended,  relying  upon  the  subscriptions  aforesaid." 
And  further  found  (under  the  head  of  "conclusions  of  law")  that 
the  defendant  "has  waved  any  defense  he  might  otherwise  have 
had  to  said  subscriptions  by  reason  of  the  manner  of  plaintift"'s 
incorporation."  The  findings  show  that  calls  were  made  upon  the 
subscribers,  including  the  defendant,  as  follows:  November  16, 
1887,  30  per  cent.,  payable  November  25;  March  17,  1888,  20 
per  cent.,  payable  March  25 ;  May  23,  1888,  20  per  cent.,  payable 
June  i;  20  per  cent.,  payable  June  15;  and  20  per  cent.,  payable 
July  I. 

I.  The  first  and  principal  point  made  by  appellant  is  that  the 
corporation  was  organized  before  there  was  a  valid  subscription 
of  $70,000  of  the  capital  stock,  contrary  to  the  agreement  sub- 
scribed by  defendant,  inasmuch  as  Goodall,  Perkins  &  Co.  sub- 
scribed for  the  steamship  company  and  railway  company  without 
authority,  and,  in  part,  conditionally.  It  appears,  however,  that 
these  subscriptions  were  changed  before  the  corporation  was  or- 


CALIFORNIA    SOUTHERN    HOTEL    CO.    V.    CALLENDER.  257 

ganized,  the  railway  company  being  dropped,  and  the  subscription 
of  the  steamship  company  being  substituted  for  that  of  both  of 
these  companies,  and  for  the  full  amount  thereof,  and  the  sub- 
scription of  the  steamship  company  and  that  of  Goodall  being 
made  unconditional,  and  so  entered  in  the  articles  of  incorpora- 
tion. It  is  also  found  by  the  court  that  Goodall,  for  himself  and 
for  the  steamship  company,  united  in  the  call  for  the  meeting  of 
the  subscribers  for  the  purpose  of  considering  the  propriety  of 
organizing  the  corporation  that  Goodall  represented  all  their  stock 
at  the  meeting;  that  he  signed  and  acknowledged  the  articles  of 
incorporation ;  and  that  the  steamship  company  and  Goodall  paid 
all  the  calls  upon  all  the  stock  subscribed  by  them.  It  is  not 
expressly  found,  nor,  it  seems  to  me,  by  necessary  implication, 
that  Goodall  was  not  authorized  by  the  steamship  company  to 
join  in  the  call  for  the  meeting,  to  make  the  change  in  the  sub- 
scription, and  to  represent  the  steamship  company  in  the  organiza- 
tion of  the  corporation;  but  only  that  the  original  subscription 
by  Goodall,  Perkins  &  Co.,  for  the  two  companies  was  without 
authority.  If  Goodall  was  authorized  by  the  steamship  company 
to  represent  it  in  all  these  matters,  the  corporation  was  properly 
organized,  according  to  the  subscription  agreement,  and  the  de- 
fendant has  no  ground  of  complaint.  As,  however,  the  findings 
are  not  quite  clear  upon  this  point,  and  as  I  think  the  judgment 
should  be  affirmed  on  another  ground,  which  does  not  involve  any 
doubtful  question  of  construction  of  the  findings,  the  decision  of 
the  case  need  not  rest  upon  this  point. 

2.  The  court  found  that  the  defendant  had  "waived  any  de- 
fense he  might  otherwise  have  had  to  said  subscription  by  reason 
of  the  manner  of  plaintifif's  incorporation."  Says  Mr.  Cook,  in  his 
book  on  Stock,  Stockholders  and  Corporation  Law  (section  i8i)  : 
"A  subscriber  may  waive  the  defense  that  the  full  capital  stock 
of  the  corporation  has  not  been  subscribed.  This  waiver  may  be 
either  express  or  implied  from  the  acts  or  declarations  of  the 
subscriber."  Again,  at  section  186.  the  same  author  says:  "Where 
the  subscriber  made  his  contract  of  subscription  previous  to,  and 
in  anticipation  of  the  incorporation  and  does  not,  by  his  subse- 
quent acts,  acquiesce  in  the  mode  of  incorporation,  he  may  set 
up  that  the  corporation  has  not  been  incorporated,  and  that  he  is 
not  liable."  At  section  198  he  says :  "A  subscriber  to  stock  in 
a  corporation  may  waive  any  defense  he  may  have  to  the  sub- 
scription. The  waiver  may  be  express,  or  it  may  be  by  implica- 
tion from  the  acts  and  declarations  of  the  subscriber.  Thus  a 
payment  of  a  call  with  full  knowledge  of  the  defense,  is  held  to 
be  a  waiver;  and  any  act  indicating  a  clear  intent  to  abide  by 
or  accept  or  pass  over  an  objection  which  the  subscriber  might 
make  will  be  held  to  be  a  waiver."  See  authorities  cited  in  notes 
to  above  quotation.  Thompson.  Liab.  Stockh.,  §  120;  Taylor, 
Corp..  §  519;  and  Railroad  Co.  v.  Johnson.  64  Amer.  Dec.  307. 
In  Fishback  v.  Van  Dusen.  33  INIinn.   iii,  22  N.  W.  Rep.  244, 

17 — Private  Corp. 


258  STOCK    SUBSCRIPTIONS. 

jVIr.  Justice  Mitchell,  speaking  for  the  court,  said:  "Whether 
there  has  been  a  waiver  is  a  question  of  fact.  It  may  be  proved 
by  various  species  of  evidence,  by  declarations,  by  acts,  or  by  for- 
bearance to  act."  Other  authorities  say  it  is  a  mixed  question  of 
law  and  fact,  but  that  each  case  must  depend  upon  its  own 
]:)eculiar  circumstances  and  surroundings.  "It  is  a  question  of 
intention,  and  a  fact  to  be  determined  by  the  triers  of  fact'' 
(Okey  v.  Insurance  Co.,  29  Mo.  App.  iii;  Ehrlich  v.  Insurance 
Co.,  88  Mo.  249 ;  Drake  v.  Insurance  Co.,  3  Grant,  Cas.  325 ; 
\Mtherell  v.  Insurance  Co.,  49  Me.  200)  ;  "and,  though  the  waiver 
must  be  intentional,  and  clearly  proven,  the  sufficiency  of  the 
evidence  relating  thereto  is  for  the  jury."  Insurance  Co.  v. 
Schollenberger,  44  Pa.  St.  259.  The  only  question  of  law  that 
can  be  involved  in  the  question  of  waiver  must  relate  to  the  legal 
definition  of  the  word.  For  example,  a  jury  might  be  properly 
instructed  as  matter  of  law  that  a  waiver  must  be  voluntary, 
and  that  it  implies  a  knowledge  of  the  right,  claim,  or  thing 
waived ;  yet  whether  it  was  voluntary,  and  whether  the  party 
had  knowledge  of  the  right  or  thing  waived,  are  still  questions 
of  fact  to  be  submitted  to  the  jury.  In  this  case  the  court  found 
the  ultimate  fact  that  defendant  had  waived  any  right  he  may 
have  had  to  object  to  the  organization  of  the  corporation.  This 
finding  implies  the  defendant's  knowledge  of  the  right  waived 
and  that  this  waiver  was  voluntary,  since  these  attributes  are  in- 
cluded in  the  legal  definition  of  a  waiver.  Nor  is  this  conclusion 
aflfected  by  the  fact  that  the  court  also  found  certain  probative 
facts,  the  only  tendency  of  which  was  to  prove  the  waiver.  That 
defendant  recognized  the  validity  of  the  corporation,  and  ac- 
quiesced in  the  building  of  the  hotel,  etc.,  "not  otherwise"  than 
by  paying  the  first  two  calls  on  his  subscription,  and  never  dis- 
senting or  protesting  against  any  of  the  acts  of  the  corporation, 
are  in  no  degree  inconsistent  with  the  waiver  found,  as  they  do 
not  tend  to  prove  that  the  waiver  was  involuntary,  or  without 
defendant's  knowledge  of  his  alleged  right.  Conceding,  therefore, 
that  the  probative  facts  (unnecessarily)  found  are  insufficient  to 
prove  a  waiver,  yet,  as  the  record  contains  no  part  of  the  evi- 
dence it  must  be  presumed  that  there  was  sufficient  evidence  to 
justify  the  finding  of  a  waiver. 

3.  It  is  contended  that  this  action  cannot  be  maintained  "on 
the  theory  that  defendant  is  a  stockholder,  and,  as  such,  liable  to 
the  corporation  for  assessments,"  for  the  alleged  reason  that  it 
does  not  appear  "that  the  corporation  ever  awarded  any  stock 
to  defendant,  or  entered  his  name  on  its  stock  book,  or  anything 
to  show  that  defendant  was  a  stockholder."  It  is  alleged  in  the 
complaint,  and  expressly  found  by  the  court,  that  defendant  was 
the  owner  of  50  shares  of  stock  at  all  the  times  when  the  calls 
were  made.  It  was  not  necessary  to  defendant's  ownership  of 
the  stock  that  a  certificate  for  the  stock  should  have  been  issued 
to  him  (Mitchell  v.  Beckman,  64  Cal.  121,  28  Pac.  Rep.  no,  and 


MINNEAPOLIS   THRESHING    MACHINE    CO.    V.    DAVIS.  259 

authorities  there  cited)  ;  nor  was  the  corporation  bound  to  issue 
such  certificate  until  the  subscription  price  was  fully  paid;  nor 
was  it  necessary  to  a  recovery  on  the  contract  of  subscription  that 
the  directors  of  the  corporation  should  have  levied  assessments 
upon  the  stock  in  the  mode  prescribed  by  the  Civil  Code.  By 
the  contract  of  subscription  the  defendant  agreed  to  pay  upon  the 
call  of  the  board  of  directors,  viz.,  "at  such  time  and  in  such 
manner  as  may  be  determined  by  the  board  of  directors  of  the 
said  corporation,  to  be  hereafter  chosen;"  and  the  action  was 
properly  brought  upon  this  contract.  West  v.  Crawford,  80  Cal. 
27,  21  Pac.  Rep.  1 123;  Water  Co.  v.  Herberger,  82  Cal.  600,  23 
Pac.  Rep.  134;  Ang.  &  A.  Corp.  §  549.  I  think  the  judgment 
should  be  affirmed. 

We  concur :     Fitzgerald,  C. ;  Belcher,  C. 

Per  Curiam.  For  the  reasons  given  in  the  foregoing  opinion 
the   judgment   is   affirmed. 


MINNEAPOLIS    THRESHING    MACHINE    CO.    v.    DAVIS. 

1889.    40  Minn,  no,  41  N.  W.  1026,  3  L.  R.  A.  796,  12  Am.  Sc. 

701. 

Subscriptions — Secret   Conditions. 

MITCHELL,  J. :  This  was  an  action  to  recover  installments 
due  on  subscriptions  to  stock  of  the  plaintiff.  The  facts  fully 
appear  from  the  findings  of  the  court  in  connection  with  Exhibits 
A  and  B  attached  to  the  complaint.  Those  material  for  present 
purposes  are,  that  a  scheme  having  been  started  to  organize  a 
manufacturing  corporation  with  $250,000  capital,  whose  works 
should  be  located  at  Junction  City,  near  ]\rinneapolis,  and  one 
McDonald  having  pro]iosed  that  if  the  citizens  of  IMinneapolis 
would  subscribe  $190,000  to  the  capital  stock  he  would  subscribe 
the  remaining  $60,000.  one  Janney,  a  promoter,  but  not  a  sub- 
scriber to  the  stock  of  the  proposed  corporation,  acting  as  a 
voluntary  solicitor,  having  with  him  the  subscription  paper  (Ex- 
hibits A  and  B)  about  April  i.  1887.  proceeded  to  canvass  for 
subscriptions  to  the  stock  of  the  proposed  corporation  on  the 
terms  and  conditions  embodied  in  the  paper.  He  first  applied  to 
defendant,  who  subscribed  $5,000  of  stock.  Afterwards,  and 
about  the  same  date,  other  citizens  re.spectively  subscribed  to  the 
stock,  on  the  same  paper,  to  the  aggregate  amount,  including 
defendant's  subscription  of  $190,000.  of  which  over  $65,000  has 
been  paid  in  to  plaintiff.  Thereupon  McDonald,  in  accordance 
with  his  proposition,  subscribed  the  remaining  $60,000  which  he 
has  paid  up  in  full.  All  the  conditions  expressed  in  the  written 
subscription  having  been  fully  performed  and  complied  with,  the 
proposed  corporation  was  afterwards,  about   April  25,    1887.   or- 


260  STOCK    SUBSCRIPTIONS. 

ganized,  and  these  subscriptions  to  its  stock  delivered  over  to  it. 
The  corporation,  acting  in  good  faith  upon  such  subscriptions, 
inchiding  that  of  defendant,  expended  large  sums  of  money  in 
locating  and  constructing  its  works,  and  entered  into  large  con- 
tracts, and  incurred  liabilities  to  the  amount  of  over  $75,000. 
During  all  this  time  the  corporation  had  no  notice  or  knowledge 
of  any  condition  being  attached  to  defendant's  subscription  other 
than  those  expressed  in  the  subscription  paper  itself.  Neither  is 
it  found  or  claimed  that  any  of  the  other  subscribers  to  the  stock 
had  any  such  notice  or  knowledge.  Defendant  was  not  present 
at  the  organization  of  the  corporation,  and  never  attended  or 
took  part  in  any  of  its  meetings,  and  had  no  notice  or  knowledge 
that  the  subscription  paper  had  been  transferred  or  delivered  over 
to  the  plaintiff,  or  that  plaintiff  relied  on  it,  until  about  November, 
1887,  just  prior  to  the  commencement  of  this  action. 

Upon  the  trial  the  defendant  was  permitted,  against  plaintiff's 
objection  and  exception,  to  testify  that  he  signed  or  subscribed  to 
the  stock  only  upon  the  express  oral  condition  and  agreement 
then  had  between  him  and  Janney  that  the  latter  should  retain  in 
his  possession  said  agreement  with  his  name  signed  thereto,  and 
not  deliver  it  to  any  one,  or  use  it  in  any  way,  until  certain  four 
persons  should  subscribe  to  the  stock,  each  m  the  sum  of  $5,000; 
that  Janney  took  the  agreement  from  defendant  on  that  express 
condition  and  understanding,  and  not  otherwise;  that  none  of 
these  four  persons  ever  did  subscribe  to  the  stock  of  the  plaintiff; 
and  that  defendant  never  authorized  Janney  or  any  one  to  deliver 
said  agreement  to  any  one  except  upon  the  condition  referred  to. 
The  court  found  the  facts  to  be  in  accordance  with  the  testimony, 
and  upon  that  ground  found  as  a  conclusion  of  law  that  defend- 
ant never  became  a  subscriber  to  the  plaintiff's  stock.  The  com- 
petency of  this  evidence  is  the  sole  question  in  this  case.  Under 
the  elementary  rule  of  evidence  that  a  written  agreement  cannot 
be  varied  or  added  to  by  parol,  it  is  not  competent  for  a  sub- 
scriber to  stock  to  allege  that  he  is  but  a  conditional  subscriber. 
The  condition  must  be  inserted  in  the  writing  to  be  effectual. 
This  rule  applies  with  special  force  to  a  case  like  the  present, 
where  to  allow  the  defendant  now  to  set  up  a  secret  parol  ar- 
rangement by  which  he  may  be  released,  while  his  fellow-sub- 
scribers continue  to  be  bound,  would  be  a  fraud,  not  only  upon 
them,  but  upon  the  corporation  which  has  been  organized  on  the 
faith  of  these  subscriptions  and  upon  its  creditors.  The  defend- 
ant of  course  does  not  attempt  to  controvert  so  elementary  a  rule 
as  the  one  suggested,  but  contends  that  the  effect  of  this  evidence 
was  not  to  vary  or  contradict  the  terms  of  the  writing,  but  to 
prove  that  there  was  never  any  delivery  of  it,  and  hence  that 
there  never  was  any  contract  at  all,  delivery  being  prerequisite  to 
the  very  existence  of  a  contract.  His  claim  is  that  the  subscrip- 
tion paper  was  given  to  and  received  by  Janney  merely  as  an 
escrow,  or  as  in  the  nature  of  an  escrow,  only  to  be  delivered  or 


MINNEAPOLIS   THRESHING    MACHINE   CO.    V.    DAVIS.  261 

used  upon  the  performance  of  certain  conditions  precedent,   and 
that  until  they  were  performed  there  could  be  no  valid  delivery. 
In  determining  this  question  it  becomes  important  to  consider 
the  nature  of  a  subscription  to  the  stock  of  a  proposed  corpora- 
tion, and  the  relation  of  the  different  parties  to  each  other,  under 
the  facts  of  this  case.     A  subscription  by  a  number  of  persons  to 
the  stock  of  a  corporation  to  be  thereafter  formed  by  them  has  in 
law  a  double  character:     First.  It  is  a  contract  between  the  sub- 
scribers   themselves   to   become   stockholders   without    further   act 
on  their  part  immediately  upon  the  formation  of  the  corporation. 
As  such  a  contract  it  is  binding  and  irrevocable  from  the  date  of 
the   subscription    (at   least  in   the  absence  of   fraud   or  mistake), 
unless  canceled  by  consent  of  all  the  subscribers  before  acceptance 
by  the  corporation.    Second.  It  is  also  in  the  nature  of  a  continu- 
ing offer  to  the  proposed  corporation,  which,  upon  acceptance  by 
it  after  its    formation,   becomes   as  to  each   subscriber  a  contract 
between  him  and  the  corporation,     i   Mor.   Priv.   Corp.   §  47  et 
seq. ;  Red  Wing  Hotel  Co.  v.  Frederick,  26  Minn.   112,   i   N.  W. 
Rep.  827.     Janney,  the  promoter  who  solicited  and  obtained  the 
subscriptions,   occupied  the  position   of  agent   for  the   subscribers 
as    a   body,   to   hold   the    subscriptions    until   the  _  corporation   was 
formed  in  accordance  with  the  terms  and  conditions  expressed  in 
the  agreement,  and  then  turn  it  over  to  the  company  without  any 
further  act  of  delivery  on  part  of  the  subscribers.     The  corpora- 
tion would  then  become  the  party  to  enforce  the   rights   of  the 
whole   body   of   subscribers.      It    follows,    then,    that,    considering 
the  subscription  as  a  contract  between  the  subscribers,  a  delivery 
to  Janney  by  a  subscriber  was  a  complete  and  valid  delivery,  so 
that  his  subscription  became  eo  instanti  a  binding  contract.     The 
case  stands  precisely  as  a  case  where  a  contract  is  delivered  by 
the  obligor  to  the  obligee.    It  cannot  therefore  be  treated  as  a  case 
where  a  writing  has  been  delivered  to  a  third  party  in  escrow. 
The  defendant,  however,   attempts   to  bring  the   case  within  the 
rule  of  Westman  v.  Crumweide,  30  Minn.  313,   15   N.  W.  Rep. 
255,  in  which  this  court  held  that  parol  evidence  was  admissible 
to  show  that  a  note  delivered  by  the  maker  to  the  payee  was  not 
intended  to  be  operative  as  a  contract  from  its  delivery,  but  only 
upon  the  happening  of  some  contingency,  though  not  expressed 
by  its  terms;  that  is,  that  the  delivery  was  only  in  the  nature  of 
an  escrow.     We  so  held  upon  what  seemed  the  great  weight  of 
authority,  although  the  doctrine,  even  to  the  extent  it  was  applied 
in  that  case,  is  a  somewhat  dangerous  one.     The  distinction  be- 
tween proving  by  parol  that  the  delivery  of  a  contract  was  con- 
ditional,  and   that   the   contract   itself   contained   a   condition   not 
expressed  in  the  writing,  is  one  founded  more  on  refinement  of 
logic  than  upon  sound  practical  grounds.     It  endangers  the  salu- 
tary   rule    that    written    contracts    shall    not    be    varied    by    parol. 
Said  Erie.  T-.  in  Pym  v.  Campbell.  6  El.  &  Bl.  370,  in  sustaining 
such  a  defense,  "I  grant  the  risk  that  such  a  defense  may  be  set 


262  STOCK    SUBSCRIPTIONS. 

up  without  ground,  and  I  agree  that  a  jury  should  therefore  look 
on  such  a  defense  with  suspicion."  And  in  all  the  cases  where  ' 
such  a  defense  has  been  sustained,  so  far  as  we  can  discover, 
they  have  been  cases  strictly  between  the  original  parties,  and 
where  no  one  has  changed  his  situation  in  reliance  upon  the  con- 
tract and  in  ignorance  of  the  secret  oral  condition  attached  to 
the  delivery,  and  hence  no  question  of  equitable  estoppel  arose. 
Many  of  the  cases  have  been  careful  to  expressly  limit  the  rule 
to  such  cases.  Benton  v.  Martin,  52  N.  Y.  570;  Sweet  v.  Stevens, 
7  R.  I.  375. 

Conceding  the  rule  of  Westman  v.  Krumweide,  supra,  to  its  full 
extent,  there  are  certain  well  recognized  doctrines  of  the  law  of 
equitable  estoppel  which  render  it  inapplicable  to  the  facts  of  the 
present  case.  This  subscription  agreement  was  not  intended  to 
lie  the  sole  contract  of  defendant.  It  was  designed  to  be  also 
signed  by  other  parties,  and  from  its  very  nature  defendant  must 
have  known  this.  Each  succeeding  subscriber  executed  it  more 
or  less  upon  the  faith  of  the  subscriptions  of  others  preceding  his. 
The  paper  purports  on  its  face  to  be  a  completed  contract,  con- 
taining all  the  terms  and  conditions  which  the  subscribers  in- 
tended it  should.  When  this  agreement  was  presented  to  others 
for  subscription  defendant  had  not  only  signed  it  in  this  form,  but 
he  had  also  done  what,  under  the  facts,  constituted,  to  all  out- 
ward appearances  at  least,  a  complete  and  valid  delivery.  He 
had  placed  it  in  the  proper  channel  according  to  the  ordinary  and 
usual  course  of  procedure  for  passing  it  over  to  the  corporation 
when  organized,  and  clothed  Janney  with  all  the  indicia  of  au- 
thority to  hold  and  use  it  for  that  purpose  without  any  other 
or  further  act  on  his  part,  untrammeled  by  any  condition  other 
than  those  expressed  in  the  writing.  In  reliance  upon  this,  others 
have  not  only  subscribed  to  the  stock,  but  have  since  paid  in  a 
large  share  of  it.  The  corporation  has  been  organized  and 
engaged  in  business,  expending  large  sums  of  money,  and  con- 
tracting large  liabilities,  all  upon  the  strength  of  these  subscrip- 
tions to  its  stock,  and  in  entire  ignorance  of  this  secret  oral  con- 
dition which  defendant  now  claims  to  have  attached  to  the  de- 
livery. To  permit  defendant  to  relieve  himself  from  liability  on 
any  such  ground  under  this  state  of  facts  would  be  a  fraud  on 
others  who  have  subscribed  and  paid  for  stock,  upon  the  corpora- 
tion, which  has  been  organized  and  incurred  liabilities  in  reliance 
upon  the  subscriptions,  and  on  creditors  who  have  trusted  it. 
The  familiar  principle  of  equitable  estoppel  by  conduct  applies, 
viz. :  Where  a  person,  by  his  w^ords  or  conduct,  wilfully  causes 
another  to  believe  in  the  existence  of  a  certain  state  of  facts,  and 
induces  him  to  act  on  that  belief  so  as  to  alter  his  own  previous 
condition,  he  is  estopped  from  denying  the  truth  of  such  facts  to 
the  prejudice  of  the  other. 

We  have  examined  all  of  the  numerous  cases  cited  by  defend- 
ant's  counsel,   and   fail   to   find   one  which,   in  our  judgment,   is 


MINNEAPOLIS   THRESHING    MACHINE   CO.    V.    DAVIS.  263 

analogous  in  its  facts,  or  the  law  of  which  will  cover  the  present 
case.     The  two  which  at  first  sight  might  seem  most  strongly  in 
his  favor  are  Beloit  and  Madison  R.  Co.  v.  Palmer.  19  Wis.  574, 
and  Ottawa,  etc.,  R.  Co.  v.  Hall,  i  Bradw.  612.     But  an  examina- 
tion of  those  cases  will  show  that  in  neither  did   nor  could   any 
question   of   estoppel   arise,   and   in   both   the   court   held   that    the 
person  to  whom  the  instrument  was  delivered  after  signature  was 
a  stranger  to  it,  so  that  it  was  strictly  a  delivery  in  escrow  to  a 
third   jxirty.      Cases   are   cited   where   a   surety   signed   a   bond   or 
non-negotiable  note,  and  delivered  it  to  the  principal  obligor  upon 
condition  that  it  should  not  be  delivered  to  the  obligee  until  some 
other   person    signed   it,    and   where,    without    such    signature,    the 
principal   obligor   delivered   it   to   the   obligee,   and   yet   the   courts 
held  that  the  surety  was  not  liable,  although   the  obligee  had  no 
notice  of  the  condition.     Such  cases  seem  usually  to  proceed  upon 
the   theory   that   a   delivery   to   the    principal    obligor    under    such 
circumstances   is    a    mere    delivery    in    escrow    to   a    stranger ;    the 
term  "stranger,"  in  the  law  of  escrows,  being  used  in  opposition 
merely  to  the  party  to  whom  the  contract  runs.     It  may  well  be 
doubted  whether  in  such  cases  where  the  instrument  is  complete 
on   its    face   the   courts   have   not   sometimes   ignored   the   law   of 
equitable    estoppel.      No   such    defense   would    be   allowed   in    the 
case  of  negotiable  paper,  and  it  is  not  clear  why  the  distinction 
should   be   drawn    on    that   line.      The    doctrine    of    estoppel    rests 
upon    totally    different    grounds,    and    operates    independently    of 
negotiability,    being     founded    upon     principles     of    equity.       But 
whether  the  cases   referred  to  be  right  or  wrong,  we  do  not  see 
that   they   are   in    point   here.      Our   conclusion    is    that   the   court 
erred  in  admitting  the  evidence  objected  to,  and  for  that  reason 
a  new  trial  must  be  awarded.     Order  reversed. 


CHAPTER  XII. 

THE  RIGHTS   OF    MEMBERSHIP. 

VENNER  V.  CHICAGO  CITY  RAILWAY  CO. 

1910.     246  Illinois    170,  92   N.   E.  643. 

Right  to  Inspection  of  Corporate  Books. 

Appeal  from  the  Appellate  Court  for  the  First  District,  heard 
in  that  court  on  appeal  from  the  Superior  Court  of  Cook  County; 
the  Hon.  Ben  M.  Smith,  Judge,  presiding. 

Mr.  CHIEF  JUSTICE  VICKERS  delivered  the  opinion  of 
the  court: 

Clarence  H.  Venner  filed  a  petition  for  mandamus  against  the 
Chicago  City  Railway  Company  and  its  president  and  secretary  to 
compel  the  defendants  to  permit  him  to  examine  the  books,  rec- 
ords and  accounts  of  the  company  which  were  under  the  control 
of  the  president  and  secretary  thereof.  A  demurrer  having  been 
sustained  to  the  petition  an  amended  petition  was  filed,  alleging 
that  Venner  acquired  certain  shares  of  stock  of  the  Chicago  City 
Railway  Company  in  the  year  1905,  which  he  held  at  the  time 
the  petition  was  filed.  He  alleged  that  he  had  made  frequent  ap- 
plications to  the  company  for  the  privilege  of  examining  its  books 
and  that  he  had  been  denied  such  right.  The  amended  petition 
contains  other  averments  which  were  intended  to  support  the  ap- 
plication for  mandamus  on  common-law  grounds.  In  the  view 
that  we  have  of  this  controversy  it  will  not  be  necessary  to  deter- 
mine the  sufficiency  of  the  petition  under  the  common  law,  and 
therefore  not  necessary  to  set  out  those  averments  in  the  petition. 
A  demurrer  interposed  to  the  answer  filed  by  defendants  was  car- 
ried back  and  sustained  to  the  amended  petition.  The  petitioner 
elected  to  abide  by  his  amended  petition,  and  it  was  dismissed 
and  judgment  rendered  against  petitioner  for  costs.  The  Appel- 
late Court  for  the  First  District  affirmed  the  judgment  below,  and 
the  cause  has  been  brought  to  this  court  by  petitioner  on  a  certifi- 
cate of  importance. 

Section  13  of  chapter  32  of  Hurd's  Revised  Statutes  of  1909 
provides  as  follows :  "It  shall  be  the  duty  of  the  directors  or 
trustees  of  every  stock  corporation  to  cause  to  be  kept  at  its 
principal  office  or  place  of  business  in  this  State,  correct  books  of 
account  of  all  its  business,  and  every  stockholder  in  such  corpora- 
tion shall  have  the  right  at  all  reasonable  times,  by  himself  or  by 
his  attorney,  to  examine  the  records  and  books  of  account  of  the 

264 


VENNER    V.    CHICAGO    CITY    RAILWAY    CO.  265 

corporation."  This  section  of  the  statute  is  a  part  of  our  general 
act  concerning  corporations  for  pecuniary  profit,  which  was  ap- 
proved April  18,   1872,  and  went  into  force  July  i,  1872. 

The  Chicago  City  Railway  Company  was  incorporated  under  a 
special  public  act  of  the  legislature,  which  was  approved  February 
14,  1859,  and  by  its  terms  went  into  force  from  and  after  its  pas- 
sage. The  act  of  1859  created  certain  persons  therein  named  a 
body  corporate,  by  the  name  of  "The  Chicago  City  Railway  Com- 
pany," and  authorized  the  said  corporation  to  "construct,  main- 
tain and  operate  a  single  or  double  track  railway,  with  all  neces- 
sary and  convenient  tracks  for  turn-outs,  side-tracks  and  appen- 
dages, in  the  city  of  Chicago,  and  in,  on,  over  and  along  said 
street  or  streets,  highway  or  highways,  bridge  or  bridges,  river  or 
rivers,  within  the  present  or  future  limits  of  the  south  or  west 
division  of  the  city  of  Chicago,  as  the  said  council  of  said  city 
have  authorized  said  corporators  or  any  of  them,  or  shall  author- 
ize said  corporators  so  to  do."  The  capital  stock  of  the  said 
corporation  was  fixed  at  $100,000,  with  power  to  increase  from 
time  to  time  at  the  pleasure  of  said  corporation,  and  it  was  pro- 
vided by  section  4  of  said  act  that  "all  the  corporate  powers  of 
said  corporation  shall  be  vested  in  and  exercised  by  a  board  of 
directors  and  such  officers  and  agents  as  said  board  shall  appoint. 
*  *  *  They  [the  board  of  directors]  may  also  adopt  such  by- 
laws, rules  and  regulations  for  the  government  of  said  corporation 
and  the  management  of  its  affairs  and  business  as  they  may  think 
proper,  not  inconsistent  with  the  laws  of  this  State." 

There  is  nothing  in  the  act  of  1859  in  relation  to  the  keeping  of 
books  by  the  corporation  or  the  inspection  thereof  by  the  stock- 
holders, and  no  express  declaration  in  said  act  that  the  corpora- 
tion thereby  chartered  should  be  subject  to  laws  that  might  there- 
after be  passed  by  the  legislature.  Under  the  situation  thus 
presented  appellant  contends  that  he  has  a  statutory  right,  under 
section  13  of  the  general  Corporation  act,  to  inspect  the  books  of 
the  company.  Appellees  deny  that  the  Chicago  City  Railway 
Company  is  subject  to  section  13,  and  insist  that  appellant's  right 
to  the  inspection  of  its  books  exists  only  under  the  common  law 
and  must  be  exercised  in  accordance  therewith. 

There  is  a  well  recognized  distinction  between  the  right  of  a 
stockholder  to  inspect  the  books  and  papers  of  a  corporation  under 
the  common  law  and  an  unlimited  right  given  by  statute.  Under 
the  former  the  examination  can  only  be  compelled  where  the 
stockholder  asks  it  in  good  faith  and  for  reasons  connected  with 
his  rights  as  a  stockholder.  (Ileminway  v.  Heminway,  58  Conn. 
443;  Sage  V.  Lake  Shore  Railroad  Co.,  70  N.  Y.  220;  Phoenix 
Iron  Co.  V.  Commonwealth,  113  Pa.  St.  563;  Stone  v.  Kellogg, 
165  111.  192.)  Where  the  right  is  conferred  by  statute  in  absolute 
terms,  the  purpose  or  motive  of  the  stockholder  in  making  the 
demand  for  an  inspection  is  not  material  and  he  cannot  be  re- 
quired to  state  his  reasons  therefor.     (Thompson  on  Corporations, 


266  THE  RIGHTS   OF    MEMBERSHIP. 

2d.  ed.  sec.  4516.)  The  weight  of  American  authority  is  to  the 
effect  that  where  the  right  is  statutory  the  stockholder  need  not 
aver  or  show  the  object  of  his  inspection,  and  it  is  no  defense 
under  a  statute  granting  the  absolute  right  to  inspection  to  allege 
improper  purposes  or  that  the  petitioner  desires  the  information 
for  the  purpose  of  injuring  the  business  of  the  corporation.  A 
clear  legal  right  given  by  a  statute  cannot  be  defeated  by  show- 
ing an  improper  motive.  If  this  were  so,  the  stockholder  would 
be  driven  from  a  certain  definite  right  given  him  by  the  statute, 
to  the  realm  of  uncertainty  and  speculation.  (Thompson  on 
Corporations,  supra;  Johnson  v.  Langdon,  135  Cal.  624,  87  Am. 
St.  Rep.  156.)  Leaving  out  of  view  entirely  the  sufficiency  of 
the  petition  under  the  common  law  it  must  be  conceded  that  it  is 
sufficient  under  the  statute,  and  it  follows  that  if  section  13  of 
the  general  Corporation  law  applies  to  the  Chicago  City  Railway 
Company,  the  court  erred  in  sustaining  the  demurrer  to  and  dis- 
missing the  amended  petition.     *     *     * 

(The  learned  judge  held  that  section  13  of  the  general  Corpora- 
tion law  did  apply  to  the  Chicago  City  Railway  Company.) 

From  what  has  been  said  it  follows  that  the  court  erred  in  sus- 
taining the  demurrer  to  the  petition. 

The  judgments  of  the  Appellate  and  Superior  Courts  are  re- 
versed and  the  cause  is  remanded  to  the  Superior  Court  for  fur- 
ther proceedings  in  accordance  with  the  views  herein  expressed. 

Reversed  and  remanded.^ 


STOKES  v.   CONTINENTAL   TRUST   CO. 

1906.     186  N.  Y.  285.  78  N.  E.   1090. 

Right  to  Subscribe  to  New  Stock. 

Appeal  from  an  order  of  the  Appellate  Division  of  the  Supreme 
Court  in  the  first  judicial  department,  entered  January  4,  1905, 
reversing  a  judgment  in  favor  of  plaintiff  entered  upon  a  decision 
of  the  court  on  trial  at  Special  Term  and  granting  a  new  trial. 

This   action  was  brought  by  a  stockholder  to  compel  his  cor- 

^ Contra,  Peo.  ex  rel.  Britton  v.  Amer.  Press  Assn.  (1912),  148  App. 
Div.  (N.  Y.)  651,  133  N.  Y.  S.  216  (two  justices  dissenting). 

Compare,  In  re  Steinway  (1899).  159  N.  Y.  250,  53  N.  E.  1103,  45  L. 
R.  A.  461n,  a  case  arising  at  common  law. 

"It  does  not  follow  that  the  courts  will  compel  the  Inspection  of  the 
bank's  books  under  all  circumstances.  In  issuing  the  writ  of  mandamus 
the  court  will  exercise  a  sound  discretion  and  grant  the  right  under 
proper  safeguards  to  protect  the  interests  of  all  concerned.  The  writ 
should  not  be  granted  for  speculative  purposes  or  to  gratify  idle  curi- 
osity or  to  aid  a  blackmailer,  but  it  may  not  be  denied  to  the  stockholder 
who  seeks  the  information  for  legitimate  purposes."  Per  Mr.  Justice 
Day  in  Guthrie  v.  Harkness  (1905),  199  U.  S.  148,  at  p.  156.  26  Sup.  Ct. 
4,  50  L.  ed.  130.— Ed. 


STOKES    V.    CONTINENTAL   TRUST    CO.  267 

poration  to  issue  to  him  at  par  sucli  a  proportion  of  an  increase 
made  in  its  capital  stock  as  the  number  of  shares  held  by  him 
before  such  increase  bore  to  the  number  of  all  the  shares  orig- 
inally issued,  and  in  case  such  additional  shares  could  not  be  de- 
livered to  him  for  his  damages  in  the  premises. 

The  defendant  is  a  domestic  banking  corporation  in  the  city  of 
New  York,  organized  in  1890,  with  a  capital  stock  of  $500,000, 
consisting  of  5.000  shares  of  the  par  value  of  $100  each.  The 
plaintiff  was  one  of  the  original  stockholders  and  still  owns  all 
the  stock  issued  to  him  at  the  date  of  organization,  together  with 
enough  more  acquired  since  to  make  221  shares  in  all.  On  the 
29th  of  January,  1902.  the  defendant  had  a  surplus  of  $1,048,- 
450.94,  which  made  the  book  value  of  the  stock  at  that  time 
$309.69  per  share.  On  the  2d  of  January,  1902,  Blair  &  Com- 
pany, a  strong  and  influential  firm  of  private  bankers  in  the  city 
of  New  York,  made  the  following  proposition  to  the  defendant : 
"If  your  stockholders  at  the  special  meeting  to  be  called  for 
January  29,  1902,  vote  to  increase  your  capital  stock  from  $500,- 
000  to  $1,000,000  you  may  deliver  the  additional  stock  to  us  as 
soon  as  issued  at  $450  per  share  ($100  par  value)  for  ourselves 
and  our  associates,  it  being  understood  that  we  may  nominate 
ten  of  the  21  trustees  to  be  elected  at  the  adjourned  annual  meet- 
ing  of   stockholders." 

The  directors  of  the  defendant  promptly  met  and  duly  author- 
ized a  special  meeting  of  the  stockholders  to  be  called  to  meet  on 
January  29,  1902,  for  the  purpose  of  voting  upon  the  proposed 
increase  of  stock  and  the  acceptance  of  the  ofTer  to  purchase  the 
same.  Upon  due  notice  a  meeting  of  the  stockholders  was  held 
accordingly,  more  than  a  majority  attending  either  in  person  or 
by  proxy.  A  resolution  to  increase  the  stock  was  adopted  by  the 
vote  of  4,197  shares,  all  that  were  cast.  Thereupon  the  plaintiflF 
demanded  from  the  defendant  the  right  to  subscribe  for  221 
shares  of  the  new  stock  at  par,  and  offered  to  pay  immediately 
for  the  same,  which  demand  was  refused.  A  resolution  directing 
a  sale  to  Blair  &  Company  at  $450  a  share  was  then  adopted  by 
a  vote  of  3,596  shares  to  241.  The  plaintiff  voted  for  the  first 
resolution  but  against  the  last,  and  before  the  adoption  of  the 
latter  he  protested  against  the  proposed  sale  of  his  proportionate 
share  of  the  stock  and  again  demanded  the  right  to  subscribe  and 
pay   for  the  same,  but  the  demand  was   refused. 

On  the  30th  of  January,  1902,  the  stock  was  increased,  and  on 
the  same  day  was  sold  to  Blair  &  Company  at  the  price  named. 
Although  the  plaintiff  formally  renewed  his  demand  for  221  shares 
of  the  new  stock  at  par  and  tendered  payment  therefor,  it  was  re- 
fused upon  the  ground  that  the  stock  had  already  been  issued  to 
Blair  &  Company.  Owing  in  part  to  the  oflFer  of  Blair  &  Com- 
pany, which  had  become  known  to  the  public,  the  market  price 
of  the  stock  had  increased  from  $450  a  share  in  September.  1901, 


268  THE  RIGHTS   OF    MEMBERSHIP. 

to  $550  in  January,  1902,  and  at  the  time  of  the  trial,  in  April, 
1904,  it  was  worth  $700  per  share. 

Prior  to  the  special  meeting  of  the  stockholders,  by  authority  of 
the  board  of  directors  a  circular  letter  was  sent  to  each  stock- 
holder, including  the  plaintiff,  giving  notice  of  the  proposition 
made  by  Blair  &  Company  and  recommending  that  it  be  accepted. 
Thereupon  the  plaintiff  notified  the  defendant  that  he  wished  to 
subscribe  for  his  proportionate  share  of  the  new  stock,  if  issued, 
and  at  no  time  did  he  waive  his  right  to  subscribe  for  the  same. 
Before  the  special  meeting,  he  had  not  been  definitely  notified  by 
the  defendant  that  he  could  not  receive  his  proportionate  part  of 
the  increase,  but  was  informed  that  his  proposition  would  "be 
taken  under  consideration." 

After  finding  these  facts  in  substance,  the  trial  court  found,  as 
conclusions  of  law,  that  the  plaintiff  had  the  right  to  subscribe  for 
such  proportion  of  the  increase,  as  his  holdings  bore  to  all  the 
stock  before  the  increase  was  made;  that  the  stockholders,  di- 
rectors and  officers  of  the  defendant  had  no  power  to  deprive  him 
of  that  right,  and  that  he  was  entitled  to  recover  the  difference 
between  the  market  value  of  221  shares  on  the  30th  of  January, 
1902,  and  the  par  value  thereof,  or  the  sum  of  $99,450,  together 
with  interest  from  said  date.  The  judgment  entered  accordingly 
was  reversed  by  the  Appellate  Division,  and  the  plaintiff  appealed 
to  this  court,  giving  the  usual  stipulation  for  judgment  absolute 
in  case  the  order  of  reversal  should  be  affirmed.     *     *     * 

VANN,  J. — No  exception  worthy  of  notice  appears  in  the  rec- 
ord, except  those  filed  to  the  conclusions  of  law  found  by  the 
trial  judge.  If  those  conclusions  are  supported  by  the  facts 
found,  the  Appellate  Division  had  no  power  to  reverse  the  judg- 
ment rendered  by  the  Special  Term  on  questions  of  law  only,  as, 
from  the  silence  of  the  record,  it  must  be  presumed  was  done. 
(Code  Civ.  Pro.  §  1338.)  If  the  facts  found  did  not  warrant  the 
legal  conclusions  of  the  trial  court  the  order  of  reversal  was  right 
and  should  be  affirmed.  Thus  the  question  presented  for  decision 
is  whether  according  to  the  facts  found  the  plaintiff  had  the  legal 
right  to  subscribe  for  and  take  the  same  number  of  shares  of  the 
new  stock  that  he  held  of  the  old. 

The  subject  is  not  regulated  by  statute  and  the  question  pre- 
sented has  never  been  directly  passed  upon  by  this  court,  and  only 
to  a  limited  extent  has  it  been  considered  by  courts  in  this  state. 
(Miller  v.  Illinois  Central  R.  R.  Co.,  24  Barb.  312;  Matter  of 
Wheeler,  2  Abb.  Pr.  (N.  S.)  361;  Currie  v.  White,  45  N.  Y. 
822.) 

In  the  first  case  cited  judgment  was  rendered  by  a  divided  vote 
of  the  General  Term  in  the  first  district.  The  court  held  that  the 
plaintiff  was  entitled  to  no  relief  because  he  did  not  own  any 
shares  when  the  new  stock  was  issued,  but  only  an  option,  and 
that  he  could  not  claim  to  be  an  actual  holder  until  he  had  exer- 


STOKES    V.    CONTINENTAL   TRUST    CO.  269 

cised  his  right  of  election.  The  court  further  said,  however,  that 
if  he  was  the  owner  of  shares  at  the  time  of  the  new  issue  he 
had  no  absokite  right  as  such  owner  to  a  distributive  allotment 
of  the  new  stock. 

Matter  of  Wheeler  was  decided  by  Judge  Mason  at  Special 
Term,  and  although  the  point  was  not  directly  involved,  the 
learned  judge  said:  "As  I  understand  the  law  all  these  old  stock- 
holders had  a  right  to  share  in  the  issuing  of  this  new  stock  in 
proportion  to  the  amount  of  stock  held  by  them.  And  if  none  of 
the  stock  was  to  be  apportioned  to  the  old  stockholders,  they  had 
certainly  the  right  to  have  the  new  stock  sold  at  public  sale,  and 
to  the  highest  bidder,  that  they  might  share  in  the  gains  arising 
from  the  sale.  In  short,  the  old  stockholders,  as  this  was  good 
stock  and  above  par,  had  a  property  in  the  new  stock,  or  a  right 
at  least  to  be  secured  the  profits  to  be  derived  from  a  fair  sale 
of  it  if  they  did  not  wish  to  purchase  it  themselves ;  and  they 
have  been  deprived  of  this  by  the  course  which  these  directors 
have  taken  with  this  new  stock  by  transferring  or  issuing  it  to 
themselves  and  others  in  a  manner  not  authorized  by  law." 

In  Currie  v.  W^iite  the  point  was  not  directly  involved,  but 
Judge  Folger,  referring  to  the  rights  acquired  under  a  certain 
contract,  said:  "One  of  these  rights  was  to  take  new  shares 
upon  any  legitimate  increase  of  the  capital  stock,  which  right 
attaches  to  the  old  shares,  not  as  a  profit  or  income,  but  as  in- 
herent in  the  shares  in  their  very  creation,"  citing  Atkins  v. 
Albree  (12  Allen,  359)  ;  Brander  v.  Brander  (4  Ves.  800,  and 
notes,  Sumner  ed.).  While  this  was  said  in  a  dissenting  opinion. 
Judge  Rapallo,  who  sp"oke  for  the  court,  concurred,  saying,  "As 
to  the  claim  for  the  additional  stock,  I  concur  in  the  conclusions 
of  my  learned  brother  Folger."  The  fair  implication  from  both 
opinions  is  that  if  the  plaintifif  had  preserved  his  rights,  he  w^ould 
have  been  entitled  to  the  new  stock. 

In   other   jurisdictions   the   decisions   support   the  claim   of   the 
plaintiflf   with   the   exception   of   Ohio   Insurance    Co.   v.    Nunne- 
macher    (15    Ind.    294),    which    turned    on    the    language    of    the 
charter.     The  leading  authority   is   Gray   v.   Portland   Bank,   de- 
cided in  1807  and  reported  in  3  Mass.  364.     In  that  case  a  ver- 
dict was  found  for  the  plaintiff,  subject,  by  the  agreement  of  the 
parties,  to  the  opinion  of  the  court  upon  the  evidence  in  the  case 
whether  the  plaintifif  was  entitled  to  recover,  and.  if  so,  as  to  the 
measure  of  damages.     The  court  held  that  stockholders  who  held 
old  stock  had  a  right  to  subscribe  for  and  take  new  stock  in  pro- 
portion  to   their   respective   shares.     As   the   corporation   refused 
this  right  to  the  plaintiff  he  was  permitted  to  recover  the  excess 
of  the  market  value  above  the  par  value,  with  interest.     In  the 
course  of  its  argument  the  court  said :     "A  share  in  the  stock  or 
trust  when  only  the  least  sum  has  been  paid  in  is  a  share  in  the 
power    of    increasing    it    when    the    trustee    determines    or    rather 
when   the  cestuis   que   trustent   agree  upon   employing   a   greater 


270  THE  RIGHTS   OF   MEMBERSHIP. 

sum.  *  *  *  A  vote  to  increase  the  capital  stock,  if  it  was  not 
the  creation  of  a  new  and  disjointed  capital,  was  in  its  nature  an 
agreement  among  the  stockholders  to  enlarge  their  shares  in  the 
amount  or  in  the  number  to  the  extent  required  to  effect  that  in- 
crease. *  *  *  If  from  the  progress  of  the  institution  and  the 
expense  incurred  in  it  any  advance  upon  the  additional  shares 
might  be  obtained  in  the  market,  this  advance  upon  the  shares 
relinquished  belonged  to  the  whole,  and  was  not  to  be  disposed  of 
at  the  will  of  a  majority  of  the  stockholders  to  the  partial  benefit 
of  some  and  exclusion  of  others." 

This  decision  has  stood  unquestioned  for  nearly  a  hundred 
years  and  has  been  followed  generally  by  courts  of  the  highest 
standing.  It  is  the  foundation  of  the  rule  upon  the  subject  that 
prevails,  almost  without  exception,  throughout  the  entire  country. 

In  Way  v.  American  Grease  Company  (60  N.  J.  Eq.  263,  269), 
the  head  note  fairly  expresses  the  decision  as  follows:  "Directors 
of  a  corporation,  which  is  fully  organized  and  in  the  active  con- 
duct of  its  business,  are  bound  to  afford  to  existing  stockholders 
an  opportunity  to  subscribe  for  any  new  shares  of  its  capital,  in 
proportion  to  their  holdings,  before  disposing  of  such  new  shares 
in  any  other  way." 

In  Eidman  v.  Bowman  (58  111.  444,  447),  it  was  said:  "When 
this  corporation  was  organized,  the  charter  and  all  of  its  fran- 
chises and  privileges  vested  in  the  shareholders  and  the  directors 
became  their  trustees  for  its  management.  The  right  to  the  re- 
mainder of  the  stock,  when  it  should  be  issued,  vested  in  the 
original  stockholders,  in  proportion  to  the  amount  each  held  of 
the  original  stock,  if  they  would  pay  for  it,  and  was  as  fully 
theirs  as  was  the  stock  already  held  and  for  which  they  had  paid." 

In  Dousman  v.  Wisconsin,  etc.  Co.  (40  Wis.  418,  421),  it  was 
held  that  a  court  of  equity  would  compel  a  corporation  to  issue 
to  every  stockholder  his  proportion  of  new  stock  on  the  ground 
that  "he  has  a  right  to  maintain  his  proportionate  interest  in  the 
corporation,  certainly  as  long  as  there  is  sufficient  stock  remaining 
imdisposed  of  by  the  corporation." 

In  Jones  v.  Morrison  (31  Minn.  140,  152),  it  was  said:  "When 
the  proposition  that  a  corporation  is  trustee  of  the  corporate 
property  for  the  benefit  of  the  stockholders  in  proportion  to  the 
stock  held  by  them  is  admitted  (and  we  find  no  well  considered 
case  which  denies  it),  it  covers  as  well  the  power  to  issue  new 
stock  as  any  other  franchise  or  property  which  may  be  of  value, 
held  by  the  corporation.  The  value  of  that  power,  where  it  has 
actual  value,  is  given  to  it  by  the  property  acquired  and  the  busi- 
ness built  up  with  the  money  paid  by  the  subsisting  stockholders. 
It  happens  not  infrequently  that  corporations,  instead  of  distribu- 
ting their  profits  in  the  way  of  dividends  to  stockholders,  accumu- 
late them  till  a  large  surplus  is  on  hand.  No  one  would  deny 
that,  in  such  case,  each  stockholder  has  an  interest  in  the  surplus 
which  the  courts  will  protect.     No  one  would  claim  that  the  offi- 


STOKES    V.    CONTINENTAL    TRUST    CO.  2"]! 

cers,  directors  or  majority  of  the  stockholders,  without  the  consent 
of  all,  could  give  away  the  surplus,  or  devote  it  to  any  other  than 
the  general  purposes  of  the  corporation.  But  when  new  stock  is 
issued,  each  share  of  it  has  an  interest  in  the  surplus  equal  to 
that  pertaining  to  each  share  of  the  original  stock.  And  if  the 
corporation,  either  through  the  officers,  directors  or  majority  of 
the  stockholders,  may  dispose  of  the  new  stock  to  whomsoever  it 
will,  at  whatever  price  it  may  fix,  then  it  has  the  power  to  di- 
minish the  value  of  each  share  of  old  stock  by  letting  in  other 
parties  to  an  equal  interest  in  the  surplus  and  in  the  good  will 
or  value  of  the  established  business." 

In  Real  Estate  Trust  Co.  v.  Bird  (90  ]Md.  229,  245),  the  court 
said:  "There  can  be  no  doubt  that  the  general  rule  is  that  when 
the  capital  stock  of  a  corporation  is  increased  by  the  issue  of  new 
shares,  authorized  by  the  charter,  the  holders  of  the  original  stock 
are  entitled  to  the  new  stock  in  the  proportion  that  the  number  of 
shares  held  by  them  bears  to  the  whole  number  before  the  in- 
crease." 

In  all  these  cases,  as  well  as  many  others.  Gray  v.  Portland 
Bank  (supra),  is  followed  without  criticism  or  question.  In  some 
cases  the  same  result  is  reached  without  citing  that  case.  Thus 
in  Jones  v.  Concord  &  IMontreal  R.  R.  Co.  (67  N.  H.  119).  it 
was  declared,  as  stated  in  the  head  note,  that  "an  issue  of  new 
shares  of  stock  in  an  increase  of  the  capital  of  a  corporation  is  a 
partial  division  of  the  common  property,  which  can  be  taken  from 
the  original  shareholders  only  by  their  consent  or  by  legal  process." 

So  in  Bank  of  Montgomery  v.  Reese  (26  Pa.  St.  143.  146;  31 
id.  78),  the  court  said:  "Morgan  L.  Reese,  as  one  of  the  stock- 
holders of  the  Bank  of  Montgomery,  was  entitled  to  a  portion  of 
the  unsold  capital  stock.  His  right  was  as  valid  as  that  of  a  ten- 
ant in  common  of  real  estate  to  his  purpart  on  a  partition.  The 
corporation  was  a  trustee  for  the  stockholders,  but  in  disregard 
of  the  duties  of  the  trust  in  distributing  this  stock  it  deprived 
Mr.  Reese  of  the  number  of  shares  to  which  he  was  entitled.  He 
has  established  his  right  in  this  action."  The  question  of  power 
was  broadly  presented  and  decided. 

In  another  case  in  the  same  state,  Morris  v.  Stevens  (178  Pa. 
St.  563,  578),  Mr.  Chief  Justice  Sterrett  used  the  following  lan- 
guage: "In  general,  the  present  holders  of  stock  have  a  primary 
right  to  subscribe  in  proportion  to  their  holdings  for  any  new 
issue.  The  stockholders  themselves  certainly  may  determine 
otherwise  and  order  a  sale  to  the  public  and  payment  of  the  pro- 
ceeds into  the  treasury.  But  this  is  exceptional  and  the  exercise 
of  a  reserved  power  which  should  not  be  permitted  unless  there 
is  a  clear  intent  of  the  stockholders  to  do  so."  (See.  also.  Cun- 
ningham's Appeal.  108  Pa.  St.  546;  Reading  Trust  Co.  v.  Read- 
ing Iron  Works,  137  Pa.  St.  282;  De  La  Cuesta  v.  Ins.  Co.,  136 
Pa.  St.  62:  Humboldt  Driving  Park  Assoc,  v.  Stevens,  34  Neb. 
528,  534;  Hart  V.  St.  Charles  Street  R.  R.  Co.,  30  La.  Ann.  758; 


272  THE  RIGHTS   OF    MEMBERSHIP. 

State  V.  Smith,  48  Vt.  290;  Atkins  v.  Albree,  94  Mass.  359;  Ham- 
mond V.  Edison  Illuminating  Co.,  131  Mich.  79;  Knapp  v.  Pub- 
lishers George  Knapp  &  Co.,  127  Mo.  53 ;  Baltimore  City  Pass. 
R.  Co.  V.  Hambleton,  ']']  Md.  341 ;  Jones  v.  C.  &  M.  R.  R.  Co., 
67  N.  H.  119;  id.  234.) 

The  elementary  writers  are  very  clear  and  emphatic  in  laying 
down  the  same  rule.  (The  learned  judge  here  referred  to  2  Beach 
on  Private  Corporations,  sec.  473;  i  Cook  on  Corporations  (4th 
ed.)  286;  10  Cyc.  543;  26  Am.  &  Eng.  Encyc.  (2d  ed.)  947;  2 
Thompson's  Commentaries,  sec.  2094;  Angell  &  Ames  on  Corpo- 
rations, 430;  Morawetz  on  Corporations,  sec.  455.) 

If  the  right  claimed  by  the  plaintiff  was  a  right  of  property  be- 
longing to  him  as  a  stockholder  he  could  not  be  deprived  of  it  by 
the  joint  action  of  the  other  stockholders  and  of  all  the  directors 
and  officers  of  the  corporation. 

What  is  the  nature  of  the  right  acquired  by  a  stockholder 
through  the  ownership  of  shares  of  stock?  What  rights  can  he 
assert  against  the  will  of  a  majority  of  the  stockholders  and  all 
the  officers  and  directors?  While  he  does  not  own  and  cannot 
dispose  of  any  specific  property  of  the  corporation,  yet  he  and 
his  associates  own  the  corporation  itself,  its  charter,  franchises  and 
all  rights  conferred  thereby,  including  the  right  to  increase  the 
stock.  He  has  an  inherent  right  to  his  proportionate  share  of  any 
dividend  declared,  or  of  any  surplus  arising  upon  dissolution,  and 
he  can  prevent  waste  or  misappropriation  of  the  property  of  the 
corporation  by  those  in  control.  Finally,  he  has  the  right  to  vote 
for  directors  and  upon  all  propositions  subject  by  law  to  the  con- 
trol of  the  stockholders,  and  this  is  his  supreme  right  and  main 
protection.  Stockholders  have  no  direct  voice  in  transacting  the 
corporate  business,  but  through  their  right  to  vote  they  can  select 
those  to  whom  the  law  intrusts  the  power  of  management  and 
control. 

A  corporation  is  somewhat  like  a  partnership,  if  one  were  pos- 
sible, conducted  wholly  by  agents  where  the  copartners  have  power 
to  appoint  the  agents,  but  are  not  responsible  for  their  acts.  The 
power  to  manage  its  affair  resides  in  the  directors,  who  are  its 
agents,  but  the  power  to  elect  directors  resides  in  the  stockholders. 
This  right  to  vote  for  directors  and  upon  propositions  to  increase 
the  stock  or  mortgage  the  assets,  is  about  all  the  power  the  stock- 
holder has.  So  long  as  the  management  is  honest,  within  the  cor- 
porate powers  and  involves  no  waste,  the  stockholders  cannot  in- 
terfere, even  if  the  administration  is  feeble  and  unsatisfactory, 
but  must  correct  such  evils  through  their  power  to  elect  other 
directors.  Hence,  the  power  of  the  individual  stockholder  to  vote 
in  proportion  to  the  number  of  his  shares,  is  vital  and  cannot  be 
cut  oft  or  curtailed  by  the  action  of  all  the  other  stockholders 
even  with  the  cooperation  of  the  directors  and  officers. 

In  the  case  before  us  the  new  stock  came  into  existence  through 
the  exercise  of  a  right  belonging  wholly  to  the  stockholders.     As 


STOKES    V.    CONTINENTAL   TRUST    CO.  273 

the  right  to  increase  the  stock  belonged  to  them,  the  stock  when 
increased  belonged  to  them  also,  as  it  was  issued  for  money  and 
not  for  property  or  for  some  purpose  other  than  the  sale  thereof 
for  money.  By  the  increase  of  stock  the  voting  power  of  the 
plaintiff  was  reduced  one-half,  and  while  he  consented  to  the  in- 
crease he  did  not  consent  to  the  disposition  of  the  new  stock  by 
a  sale  thereof  to  Blair  &  Company  at  less  than  its  market  value, 
nor  by  sale  to  any  person  in  any  way  except  by  an  allotment  to 
the  stockholders.  The  increase  and  sale  involved  the  transfer  of 
rights  belonging  to  the  stockholders  as  part  of  their  investment. 
The  issue  of  new  stock  and  the  sale  thereof  to  Blair  &  Company 
was  not  only  a  transfer  to  them  of  one-half  the  voting  power  of 
the  old  stockholders,  but  also  of  an  equitable  right  to  one-half 
the  surplus  which  belonged  to  them.  In  other  words,  it  was  a 
partial  division  of  the  property  of  the  old  stockholders.  The 
right  to  increase  stock  is  not  an  asset  of  the  corporation  any  more 
than  the  original  stock  when  it  was  issued  pursuant  to  subscrip- 
tion. The  ownership  of  stock  is  in  the  nature  of  an  inherent  but 
indirect  power  to  control  the  corporation.  The  stock  when  issued 
ready  for  delivery  does  not  belong  to  the  corporation  in  the  way 
that  it  holds  its  real  and  personal  property,  with  power  to  sell  the 
same,  but  is  held  by  it  with  no  power  of  alienation  in  trust  for 
the  stockholders,  who  are  the  beneficial  owners  and  become  the 
legal  owners  upon  paying  therefor.  The  corporation  has  no  rights 
hostile  to  those  of  the  stockholders,  but  is  the  trustee  for  all  in- 
cluding the  minority.  The  new  stock  issued  by  the  defendant 
under  the  permission  of  the  statute  did  not  belong  to  it,  but  was 
held  by  it  the  same  as  the  original  stock  when  first  issued  was 
held  in  trust  for  the  stockholders.  It  has  the  same  voting  power 
as  the  old,  share  for  share.  The  stockholders  decided  to  enlarge 
their  holdings,  not  by  increasing  the  amount  of  each  share,  but 
by  increasing  the  number  of  shares.  The  new  stock  belonged  to 
the  stockholders  as  an  inherent  right  by  virtue  of  their  being 
stockholders,  to  be  shared  in  proportion  upon  paying  its  par  value 
or  the  value  per  share  fixed  by  vote  of  a  majority  of  the  stock- 
holders, or  ascertained  by  a  sale  at  public  auction.  While  the 
corporation  could  not  compel  the  plaintiff  to  take  new  shares  at 
any  price,  since  they  were  issued  for  money  and  not  for  property, 
it  could  not  lawfully  dispose  of  those  shares  without  giving  him 
a  chance  to  get  his  proportion  at  the  same  price  that  outsiders 
got  theirs.  He  had  an  inchoate  right  to  one  share  of  the  new 
stock  for  each  share  owned  by  him  of  the  old  stock,  provided  he 
was  ready  to  pay  the  price  fixed  by  the  stockholders.  If  so  situ- 
ated that  he  could  not  take  it  himself,  he  was  entitled  to  sell  the 
right  to  one  who  could,  as  is  frequently  done.  Even  this  gives 
an  advantage  to  capital,  but  capital  necessarily  has  some  advan- 
tage. Of  course,  there  is  a  distinction  when  the  new  stock  is  is- 
sued in  payment  for  property,  but  that  is  not  this  case.  The  stock 
in  question  was  issued  to  be  sold  for  money  and  was  sold   for 

18 — Private  Corp. 


274  "^^^  RIGHTS   OF    MEMBERSHIP. 

money  only.  A  majority  of  the  stockholders,  as  part  of  their 
power  to  increase  the  stock,  may  attach  reasonable  conditions 
to  the  disposition  thereof,  such  as  the  requirement  that  every  old 
stockholder  electing  to  take  new  stock  shall  pay  a  fixed  price 
therefor,  not  less  than  par,  however,  owing  to  the  limitation  of 
the  statute.  They  may  also  provide  for  a  sale  in  parcels  or  bulk 
at  public  auction,  when  every  stockholder  can  bid  the  same  as 
strangers.  They  cannot,  however,  dispose  of  it  to  strangers 
against  the  protest  of  any  stockholder  who  insists  that  he  has  a 
right  to  his  proportion.  Otherwise  the  majority  could  deprive 
the  minority  of  their  proportionate  power  in  the  election  of  di- 
rectors and  of  their  proportionate  right  to  share  in  the  surplus, 
each  of  which  is  an  inherent,  pre-emptive  and  vested  right  of 
property.  It  is  inviolable  and  can  neither  be  taken  away  nor 
lessened  without  consent,  or  a  waiver  implying  consent.  The 
plaintiff  had  power,  before  the  increase  of  stock,  to  vote  on  221 
shares  of  stock,  out  of  a  total  of  5,000,  at  any  meeting  held  by 
the  stockholders  for  any  purpose.  By  the  action  of  the  majority, 
taken  against  his  will  and  protest,  he  now  has  only  one-half  the 
voting  power  that  he  had  before,  because  the  number  of  shares 
has  been  doubled  while  he  still  owns  but  221.  This  touches  him 
as  a  stockholder  in  such  a  way  as  to  deprive  him  of  a  right  of 
property.  Blair  &  Company  acquired  virtual  control,  while  he 
and  the  other  stockholders  lost  it.  We  are  not  discussing  equities, 
but  legal  rights,  for  this  is  an  action  at  law,  and  the  plaintiff  was 
deprived  of  a  strictly  legal  right.  If  the  result  gives  him  an  ad- 
vantage over  other  stockholders,  it  is  because  he  stood  upon  his 
legal  rights,  while  they  did  not.  The  question  is  what  were  his 
legal  rights,  not  what  his  profits  may  be  under  the  sale  to  Blair  & 
Company,  but  what  it  might  have  been  if  the  new  stock  had  been 
issued  to  him  in  proportion  to  his  holding  of  the  old.  The  other 
stockholders  could  give  their  property  to  Blair  &  Company,  but 
they  could  not  give  his. 

A  share  of  stock  is  a  share  in  the  power  to  increase  the  stock, 
and  belongs  to  the  stockholders  the  same  as  the  stock  itself. 
When  that  power  is  exercised,  the  new  stock  belongs  to  the  old 
stockholders  in  proportion  to  their  holding  of  old  stock,  subject  to 
compliance  with  the  lawful  terms  upon  which  it  is  issued.  When 
the  new  stock  is  issued  in  payment  for  property  purchased  by 
the  corporation,  the  stockholders'  right  is  merged  in  the  purchase 
and  they  have  an  advantage  in  the  increase  of  the  property  of 
the  corporation  in  proportion  to  the  increase  of  stock.  When  the 
new  stock  is  issued  for  money,  while  the  stockholders  may  provide 
that  it  be  sold  at  auction  or  fix  the  price  at  which  it  is  to  be  sold, 
each  stockholder  is  entitled  to  his  proportion  of  the  proceeds  of 
the  sale  at  auction,  after  he  has  had  a  right  to  bid  at  the  sale,  or 
to  his  proportion  of  the  new  stock  at  the  price  fixed  by  the  stock- 
holders. 

We  are  thus  led  to  lay  down  the  rule  that  a  stockholder  has  an 


STOKES    V.    CONTINENTAL    TRUST    CO.  2/5 

inherent  right  to  a  proportionate  share  of  new  stock  issued  for 
money  only  and  not  to  purchase  property  for  the  purposes  of  the 
corporation  or  to  effect  a  consolidation,  and  while  he  can  waive 
that  right,  he  cannot  be  deprived  of  it  without  his  consent  except 
when  the  stock  is  issued  at  a  fixed  price  not  less  than  par  and  he 
is  given  the  right  to  take  at  that  price  in  proportion  to  his  holding, 
or  in  some  other  equitable  way  that  will  enable  him  to  protect 
his  interest  by  acting  on  his  own  judgment  and  using  his  own 
resources.  This  rule  is  just  to  all  and  tends  to  prevent  the  tyr- 
anny of  majorities  which  needs  restraint,  as  well  as  virtual  at- 
tempts to  blackmail  by  small  minorities  which  should  be  prevented. 
The  remaining  question  is  whether  the  plaintiff  waived  his 
rights  by  failing  to  do  what  he  ought  to  have  done,  or  by  doing 
something  he  ought  not  to  have  done.  He  demanded  his  share 
of  the  new  stock  at  par,  instead  of  at  the  price  fixed  by  the 
stockholders,  for  the  authorization  to  sell  at  $450  a  share  was 
virtually  fixing  the  price  of  the  stock.  He  did  more  than  this, 
however,  for  he  not  only  voted  against  the  proposition  to  sell  to 
Blair  &  Company  at  $450,  but  as  the  court  expressly  found,  he 
"protested  against  the  proposed  sale  of  his  proportionate  share 
of  the  stock  and  again  demanded  the  right  to  subscribe  and  pay 
for  the  same  which  demands  were  again  refused,"  and  "the  reso- 
lution was  carried  notwithstanding  such  protest  and  demands." 
Thus  he  protested  against  the  sale  of  his  share  before  the  price 
was  fixed,  for  the  same  resolution  fixed  the  price  and  directed 
the  sale,  which  was  promptly  carried  into  effect.  If  he  had  not 
attended  the  meeting,  called  upon  due  notice  to  do  precisely  what 
was  done,  perhaps  he  would  have  waived  his  rights,  but  he  at- 
tended the  meeting  and  before  the  price  was  fixed  demanded  the 
right  to  subscribe  for  221  shares  at  par  and  offered  to  pay  for 
the  same  immediately.  It  is  true  that  after  :he  price  was  fixed 
he  did  not  offer  to  take  his  share  at  that  price,  but  he  did  not 
acquiesce  in  the  sale  of  his  proportion  to  Blair  &  Company,  and 
unless  he  acquiesced  the  sale  as  to  him  was  without  right.  He 
was  under  no  obligation  to  put  the  corporation  in  default  by  mak- 
ing a  demand.  The  ordinary  doctrine  of  demand,  tender  and 
refusal  has  no  application  to  this  case.  The  plaintiff  had  made  no 
contract.  He  had  not  promised  to  do  anything.  No  duty  of  per- 
formance rested  upon  him.  He  had  an  absolute  right  to  the  new 
stock  in  proportion  to  his  holding  of  the  old  and  he  gave  notice 
that  he  wanted  it.  It  was  his  property  and  could  not  be  disposed 
of  without  his  consent.  He  did  not  consent.  He  protested  in 
due  time,  and  the  sale  was  made  in  defiance  of  his  protest.  While 
in  connection  with  his  protest  he  demanded  the  right  to  subscribe 
at  par,  that  demand  was  entirely  proper  when  made,  because  the 
price  had  not  then  been  fixed.  After  the  price  was  fixed  it  was 
the  duty  of  the  defendant  to  offer  him  his  proportion  at  that 
price,  for  it  had  notice  that  he  had  not  acquiesced  in  the  pro- 
posed  sale   of   his   share,   but   wanted   it   himself.     The   directors 


276  THE   RIGHTS   OF    MEMBERSHIP. 

were  under  the  legal  obligation  to  give  him  an  opportunity  to 
purchase  at  the  price  fixed  before  they  could  sell  his  property  to 
a  third  party,  even  with  the  approval  of  a  large  majority  of  the 
stockholders.  If  he  had  remained  silent  and  had  made  no  request 
or  protest  he  would  have  waived  his  rights,  but  after  he  had  given 
notice  that  he  wanted  his  part  and  had  protested  against  the  sale 
thereof,  the  defendant  was  bound  to  offer  it  to  him  at  the  price 
fixed  by  the  stockholders.  By  selling  to  strangers  without  thus 
oft'ering  to  sell  to  him,  the  defendant  wrongfully  deprived  him 
of  his  property  and  is  liable  for  such  damages  as  he  actually  sus- 
tained. 

The  learned  trial  court,  however,  did  not  measure  the  damages 
according  to  law.  The  plaintiff  was  not  entitled  to  the  difference 
between  the  par  value  of  the  new  stock  and  the  market  value 
thereof,  for  the  stockholders  had  the  right  to  fix  the  price  at  which 
the  stock  should  be  sold.  They  fixed  the  price  at  $450  a  share, 
and  for  the  failure  of  the  defendant  to  offer  the  plaintiff  his  share 
at  that  price  we  hold  it  liable  in  damages.  His  actual  loss,  there- 
fore, is  $100  per  share,  or  the  difference  between  $450,  the  price 
that  he  would  have  been  obliged  to  pay  had  he  been  permitted 
to  purchase,  and  the  market  value  on  the  day  of  sale,  which  was 
$550.  This  conclusion  reciuires  a  reversal  of  the  judgment  ren- 
dered by  the  Appellate  Division  and  a  modification  of  that  ren- 
dered by  the  trial  court. 

The  order  appealed  from  should  be  reversed  and  the  judgment 
of  the  trial  court  modified  by  reducing  the  damages  from  the  sum 
of  $99,450,  with  interest  from  January  30,  1902,  to  the  sum  of 
$22,100,  with  interest  from  that  date,  and  by  striking  out  the 
extra  allowance  of  costs,  and  as  thus  modified  the  judgment  of 
the  trial  court  is  affirmed,  without  costs  in  this  court  or  in  the 
Appellate  Division  to  either  party. 

HAIGHT,  J.  (dissenting). — I  agree  that  the  rule  that  we 
should  adopt  is  that  a  stockholder  in  a  corporation  has  an  inherent 
right  to  purchase  a  proportionate  share  of  new  stock  issued  for 
money  only,  and  not  to  purchase  property  necessary  for  the  pur- 
poses of  the  corporation  or  to  effect  a  consolidation.  While  he 
can  waive  that  right  he  cannot  be  deprived  of  it  without  his  con- 
sent, except  by  sale  at  a  fixed  price  at  or  above  par,  in  which  he 
may  buy  at  that  price  in  proportion  to  his  holding  or  in  some 
other  equitable  way  that  will  enable  him  to  protect  his  interest 
by  acting  on  his  own  judgment  and  using  his  own  resources.  I, 
however,  differ  with  Judge  Vann  as  to  his  conclusions  as  to  the 
rights  of  the  plaintiff  herein.  Under  the  findings  of  the  trial 
court  the  plaintiff  demanded  that  his  share  of  the  new  stock 
should  be  issued  to  him  at  par,  or  $100  per  share,  instead  of  $450 
per  share,  the  price  offered  by  Blair  &  Company  and  the  price 
fixed  at  the  stockholders'  meeting  at  which  the  new  stock  was 
authorized  to  be  sold.     This  demand  was  made  after  the  passage 


STOKES    V.    CONTINENTAL   TRUST    CO.  277 

of  the  resolution  authorizing  the  increase  of  the  capital  stock  of 
the  defendant  company  and  before  the  passage  of  the  resolution 
authorizing  a  sale  of  the  new  stock  to  Blair  &  Company  at  the 
price  specified.  After  the  passage  of  the  second  resolution  he  ob- 
jected to  the  sale  of  his  proportionate  share  of  the  new  stock  to 
Blair  &  Company  and  again  demanded  that  it  be  issued  to  him, 
and  the  following  day  he  made  a  legal  tender  for  the  amount  of 
his  portion  of  the  new  stock  at  $ioo  per  share.  There  is  no  find- 
ing of  fact  or  evidence  in  the  record  showing  that  he  was  ever 
ready  or  willing  to  pay  $450  per  share  for  the  stock.  He  knew 
that  Blair  &  Company  represented  Marshall  Field  and  others  at 
Chicago,  great  dry  goods  merchants,  and  that  they  had  made  a 
written  offer  to  purchase  the  new  stock  of  the  company  provided 
the  stockholders  would  authorize  an  increase  of  its  capital  stock 
from  five  hundred  thousand  to  a  million  dollars.  He  knew  that 
the  trustees  of  the  company  had  called  a  special  meeting  of  the 
stockholders  for  the  purpose  of  considering  the  offer  so  made 
by  Blair  &  Company.  He  knew  that  the  increased  capitalization 
proposed  was  for  the  purpose  of  enlarging  the  business  of  the 
company  and  bringing  into  its  management  the  gentlemen  referred 
to.  There  is  no  pretense  that  any  of  the  stockholders  would  have 
voted  for  an  increase  of  the  capital  stock  otherwise  than  for  the 
purpose  of  accepting  the  offer  of  Blair  &  Company.  All  were 
evidently  desirous  of  interesting  the  gentlemen  referred  to  in  the 
company,  and  by  securing  their  business  and  deposits  increase  the 
earnings  of  the  company.  This  the  trustees  carefully  considered, 
and  in  their  notice  calling  the  special  "meeting  of  the  stockholders 
distinctly  recommended  the  acceptance  of  the  offer.  What,  then, 
was  the  legal  effect  of  the  plaintiff's  demand  and  tender?  To  my 
mind  it  was  simply  an  attempt  to  make  something  out  of  his  as- 
sociates, to  get  for  $100  per  share  the  stock  which  Blair  &  Com- 
pany had  offered  to  purchase  for  $450  per  share;  and  that  it  was 
the  equivalent  of  a  refusal  to  pay  $450  per  share,  and  its  effect 
is  to  waive  his  right  to  procure  the  stock  by  paying  that  amount. 
An  acceptance  of  his  offer  would  have  been  most  unjust  to  the 
remaining  stockholders.  It  would  not  only  have  deprived  them 
of  the  additional  sum  of  $350  per  share,  which  had  been  offered 
for  the  stock,  but  it  would  have  defeated  the  object  and  purpose 
for  which  the  meeting  was  called,  for  it  was  well  understood  that 
Blair  &  Company  would  not  accept  less  than  the  whole  issue  of 
the  new  stock.  But  this  is  not  all.  It  appears  that  prior  to  the 
offer  of  Blair  &  Company  the  stock  of  the  company  had  never 
been  sold  above  $450  per  share;  that  thereafter  the  stock  rapidly 
advanced  until  the  day  of  the  completion  of  the  sale  on  the  30th 
of  January,  when  its  market  value  was  $550  per  share;  but  this, 
under  the  stipulation  of  facts,  was  caused  by  the  rumor  and  sub- 
sequent announcement  and  consummation  of  the  proposition  for 
the  increase  of  the  stock  and  the  sale  of  such  increase  to  Blair  5: 
Company  and  their  associates.     It  is  now  proposed  to  give  the 


2^8  THE  RIGHTS   OF    MEMBERSHIP. 

plaintiff  as  damages  such  increase  in  the  market  value  of  the 
stock,  even  though  such  value  was  based  upon  the  understanding 
that  Blair  &  Company  were  to  become  stockholders  in  the  cor- 
poration, which  the  acceptance  of  plaintiff's  offer  would  have  pre- 
vented. '  This,  to  my  mind,  should  not  be  done.  I,  therefore, 
favor  an  affirmance. 

Cullen,  Ch.  J.,  Werner  and  Hiscock,  JJ.,  concur  with  Vann,  J.; 
Willard  Bartlett,  J.,  concurs  with  Haight,  J.;  O'Brien,  J.,  absent. 

Ordered  accordingly. 

KING  V.  PATERSON  AND  HUDSON  RIVER  R.  CO. 

1861.     29  N.  J.  L.  504. 

Right  to  Dividends. 

In  error  to  the  Supreme  Court. 

The  opinion  of  the  court  was  delivered  by  the  Chancellor. — 
The  action  is  brought  to  recover  the  amount  of  two  dividends, 
declared  in  January  and  July,  1857,  upon  two  hundred  shares  of 
the  capital  stock  of  the  corporation  owned  by  the  plaintiffs.  The 
dividends  were  made  payable  at  the  branch  office  of  the  Ohio 
Life  Insurance  and  Trust  Company,  in  the  city  of  New  York, 
the  trust  company  being  appointed  registers  of  the  railroad  com- 
pany to  transfer  stock  and  to  pay  dividends.  Notice  of  the  divi- 
dends and  of  the  time  and 'place  of  payment  was  published  in  a 
newspaper  printed  and  published  in  the  city  of  New  York.  The 
money  to  pay  the  dividends  was  deposited  by  the  defendants  in 
the  office  of  the  trust  company,  before  the  day  of  payment  of 
each  of  said  dividends,  ready  to  be  paid  to  the  plaintiffs  on  their 
application.  The  money  was  left  in  the  hands  of  the  trust  com- 
pany until  the  24th  of  August,  1857,  when  the  company  failed, 
and  the  money  was  lost. 

After  a  dividend  is  declared,  all  community  of  interest  in  rela- 
tion to  such  dividend,  as  between  the  stockholders  themselves  and 
between  the  stockholders  and  the  corporation,  is  at  an  end.  The 
right  of  a  party  to  whom  the  dividend  is  payable  is  recognized 
as  a  separate  and  independent  right,  which  may  be  enforced  as 
against  the  corporation.  Davis  v.  The  Bank  of  England,  5  Barn. 
&  Cress.  185;  Coles  v.  The  Bank  of  England,  10  Ad.  &  E.  437; 
Carlisle  v.  South  Eastern  Railway  Co.,  6  English  Rail.  Cas.  685; 
I   Shelf,  on  Rail.  205. 

This  principle  was  fully  recognized  in  Le  Roy  v.  The  Globe 
Insurance  Co.,  2  Edw.  Ch.  R.  657,  although  the  precise  character 
of  the  relation  subsisting  between  the  stockholder  and  the  cor- 
poration in  respect  to  the  dividend  was  not  clearly  defined.  In 
the  ojjinion  of  the  Vice  Chancellor,  if  payment  of  the  dividends 
declared  is   withheld  by   a  solvent  corporation,  payment  may  be 


KING   V.    PATiiRSON   AND    HUDSON    RIVER   R.    CO.  2/9 

enforced  at  the  instance  of  the  stockholders  by  mandamus,  by 
suit  at  law  on  behalf  of  individual  stockholders  for  the  payment 
of  the  money,  or  by  bill  in  equity  to  obtain  possession  of  the 
money  as  a  trust  fund,  which  the  corporation  were  bound  to 
distribute,  and  over  which  they  had  no  other  control.  In  that 
case,  the  company  being  insolvent,  it  was  held  that  the  money 
appropriated  and  set  apart  for  distribution  among  the  stockhold- 
ers by  way  of  dividend  became  a  trust  fund  in  the  hands  of  the 
corporation,  to  which  the  stockholders,  as  individuals,  had  ac- 
quired vested  rights,  and  that  they  consequently  were  entitled  to 
the  fund  in  preference  to  the  creditors  of  the  corporation. 

In  Kane  v.  Bloodgood,  7  Johns.  C.  R.  90,  Chancellor  Kent  held 
that  an  action  at  law  for  money  had  and  received  would  lie  by  a 
stockholder  against  a  corporation  for  the  recovery  of  a  dividend, 
and  that  it  was  not  such  an  express  trust  as  would  take  the  case 
out  of  the  statute  of  limitations. 

The  true  principle  is,  that  the  dividend,  from  the  time  that  it  is 
declared,  becomes  a  debt  due  from  the  corporation  to  the  individual 
stockholder,  for  the  recovery  of  which,  after  demand  of  payment, 
an  action  at  law  may  be  maintained.  State  v.  Bait,  and  Ohio 
Railway,  6  Gill,  363;  Phil.,  Wil.  and  Bait.  Railway  v.  Crowell,  28 
Penn.  St.  Rep.  329;  Ohio  City  v.  Cleveland  and  Toledo  Railway, 
6  Ohio  St.  Rep.  329. 

Like  any  other  debt,  it  may  be  set  off  against  the  debt  of  the 
stockholder  to  the  corporation.  Bates  v.  New  York  Insurance 
Co.,  3  Johns.  Cas.  238;   12  Serg.  &  R.  "j"]. 

It  may  be,  by  banking  corporations,  sometimes  carried  to  the 
general  account  of  the  stockholder  with  the  corporation,  and  is 
thus  applied  in  adjusting  balances  between  the  parties  or  in  satis- 
fying the  claims  of  the  corporation  against  the  stockholder.  They 
thus  act  in  the  character  not  of  trustees,  but  of  debtors.  The 
fund  is  dealt  with  not  as  a  trust  fund,  but  as  money  due.  And 
why  should  it  not  be  so  regarded?  What  principle  is  violated? 
Does  not  sound  policy  require  that  the  relation  between  the  stock- 
holder and  the  corporation  in  relation  to  the  dividend  should  be 
simply  that  of  debtor  and  creditor ;  that  the  stockholder  should 
have  his  remedy  at  law,  and  that  the  corporation  should  be  per- 
mitted to  apply  it  by  way  of  set-off  to  satisfy  demands  against 
the  stockholder? 

Why  is  the  case  distinguishable  in  principle  from  that  of  a 
stockholder  who  is  also  a  depositor?  The  dividend  and  the  de- 
posit are  alike  debts  due  from  the  corporation  to  the  stockholder. 
Both  are  in  the  keeping  and  under  the  control  of  the  corporation 
with  the  assent  and  concurrence  of  the  stockholder.  It  has  been 
repeatedly  decided  that  an  action  lies  for  a  deposit  by  a  depositor 
against  a  corporation  after  demand.  The  fact  that  he  is  a  mem- 
ber of  the  corporation  cannot  vary  the  principle.  Downes  v.  The 
Phoenix  Bank  of  Charlestown,  6  Hill,  297;  Watson  v.  The  Phoe- 
nix Bank,  8  Mete.  217. 


28o  THE   RIGHTS   OF    MEMBERSHIP. 

In  a  limited  sense,  the  deposit  and  the  dividend  in  the  hands 
of  the  corporation  are  alike  trusts.  Every  deposit  is  a  direct 
trust.  Every  person  who  receives  money  to  be  paid  to  another, 
or  to  be  applied  to  a  particular  purpose,  to  which  he  does  not 
apply  it,  is  a  trustee.  Kane  v.  Bloodgood,  7  J.  C.  R.  no;  Scott 
V.  Surman,  Willes,  404.  In  this  limited  sense,  and  in  no  other, 
the  corporation  is  a  trustee  of  the  dividend  unpaid  to  the  stock- 
holder. 

The  debt  is  strictly  demandable  and  to  be  paid  at  the  office  of 
the  corporation.  Admitting  the  right  of  the  corporation  to  make 
it  payable  elsewhere,  it  must  be  done  at  the  risk  of  the  corpora- 
tion. The  debtor  has  no  right,  without  the  consent  of  the  cred- 
itor, express  or  implied,  to  intrust  a  third  party  with  the  fund  for 
the  purposes  of  payment.  The  trust  company  with  whom  the 
funds  were  deposited  for  payment  was  the  agent  of  the  corpora- 
tion, not  of  the  stockholders;  of  the  debtor,  not  of  the  creditor. 
If  the  agent  prove  faithless,  or  the  fund  is  lost  in  his  hands,  the 
loss  must  fall  upon  the  owner.  The  deposit  was  made  in  the 
name  of  the  corporation,  and  was  subject  to  their  control.  There 
is  nothing  in  the  special  verdict  that  shows  a  consent,  express  or 
implied,  on  the  part  of  the  plaintiffs  to  their  funds  being  intrusted 
to,  or  deposited  with,  the  Ohio  Life  and  Trust  Company. 

Strong  considerations  in  support  of  this  conclusion  may,  per- 
haps, as  was  urged  upon  the  argument,  be  derived  from  the  pe- 
culiar provisions  of  the  charter  of  the  railroad  company,  as  well 
as  from  the  policy  of  the  law,  which  would  deny  to  a  corporation, 
within  this  state,  the  right  to  deposit  moneys  due  to  its  creditors 
in  the  hands  of  a  foreign  corporation.  But  the  decision  is  design- 
edly based  upon  the  sole  ground,  that  after  a  dividend  is  declared, 
it  becomes  a  debt  due  from  the  corporation  to  the  stockholder 
as  an  individual,  and  that  the  selection  of  an  agent  for  the  pay- 
ment of  that  debt  by  the  debtor  without  the  concurrence  of  the 
creditor  must  be  at  the  risk  of  the  debtor  alone.  The  fund  re- 
mains the  property  of  the  corporation  until  payment  is  made.  If 
a  loss  is  sustained,  it  falls  upon  the  owner. 

The  judgment  must  be  affirmed. 

For  affirmance. — The  Chancellor,  the  Chief  Justice,  and  Judges 
Brown,  Combs,  Cornelison,  Kennedy,   Risley,   Swain,  and  Wood. 

For  reversal. — None.^ 

*  As  to  stock  dividend,  see,  Williams  v.  Western  Union  Telegraph 
Co.,  93  N.  Y.  162. 

As  to  right  between  life  tenant  and  remainderman  to  stock  dividend, 
see,  Gibbons  v.  Mahon,  136  U.  S.  549,  34  L.  ed.  525,  10  Sup.  Ct.  1057; 
Earp's  Appeal,  28  Pa.  St.  368;  McLouth  v.  Hunt,  154  N.  Y.  179,  48  N. 
E.  548,  39  L.  R.  A.  230.— Ed. 


HAWES   V.    OAKLAND.  281 

HAWES  V.  OAKLAND. 

1881.     104  U.  S.  450,  26  L.  ed.  827.1 

Stockholder's  Representative  Suit. 

MR.  JUSTICE  MILLER  delivered  the  opinion  of  the  court. 

This  is  an  appeal  from  a  decree  in  chancery  dismissing  the 
complainant's  bill,  wherein  he,  a  citizen  of  New  York,  alleges  that 
he  is  a  stockholder  in  the  Contra  Costa  Water-works  Company, 
a  California  corporation,  and  that  he  files  it  on  behalf  of  himself 
and  all  other  stockholders  who  may  choose  to  come  in  and  con- 
tribute to  the  costs  and  expenses  of  the  suit. 

The  defendants  are  the  city  of  Oakland,  the  Contra  Costa 
Water-works  Company,  and  Anthony  Chabot,  Henry  Pierce,  An- 
drew J.  Pope,  Charles  Holbrook,  and  John  W.  Coleman,  trustees 
and  directors  of  the  company. 

The  foundation  of  the  complaint  is  that  the  city  of  Oakland 
claims  at  the  h?nds  of  the  company  water,  without  compensation, 
for  all  municipal  purposes  whatever,  including  watering  the 
streets,  public  squares  and  parks,  flushing  sewers,  and  the  like, 
whereas  it  is  only  entitled  to  receive  water  free  of  charge  in  cases 
of  fire  or  other  great  necessity ;  that  the  company  comply  with 
this  demand,  to  the  great  loss  and  injury  of  the  company,  to  the 
diminution  of  the  dividends  which  should  come  to  him  and  other 
stockholders,  and  to  the  decrease  in  the  value  of  their  stock.  The 
allegation  of  his  attempt  to  get  the  directors  to  correct  this  evil 
will  be  given  in  the  language  of  the  bill. 

He  says  that  "on  the  tenth  day  of  July,  1878,  he  applied  to  the 
president  and  board  of  directors  or  trustees  of  said  water  com- 
pany, and  requested  them  to  desist  from  their  illegal  and  improper 
practices  aforesaid,  and  to  limit  the  supply  of  water  free  of 
charge  to  said  city  to  cases  of  fire  or  other  great  necessity,  and 
that  said  board  should  take  immediate  proceedings  to  prevent  said 
city  from  taking  water  from  the  works  of  said  company  for  any 
other  purpose  without  compensation ;  but  said  board  of  directors 
and  trustees  have  wholly  declined  to  take  any  proceedings  what- 
ever in  the  premises,  and  threatened  to  go  on  and  furnish  water 
to  the  extent  of  said  company's  means  to  said  city  of  Oakland 
free  of  charge,  for  all  municipal  purposes  as  has  heretofore  been 
done,  and  in  cases  other  than  cases  of  fire  or  other  great  neces- 
sity, except  as  for  family  uses  hereinbefore  referred  to;  and  your 
orator  avers  that  by  reason  of  the  premises  said  water  company 
and  your  orator  and  the  other  stockholders  thereof  have  suffered, 
and  will,  by  a  continuance  of  said  acts,  hereafter  suffer,  great 
loss  and  damage." 

To  this  bill  the  water-works  company  and  the  directors   failed 

'See,  Mozley  v.  Alston  (1847),  1  Ph.  790.  Cf.  Bagshaw  v.  Eastern 
&c.  R.  Co.  (1849),  7  Hare  114.  129;  MacDousjall  v.  Gardiner  (1875), 
L.  R.  1  Ch.  Div.  13,  25;  Alexander  v.  Automatic  Tel.  Co.  L.  R.  (1900), 
2  Ch.  Div.  56,  69,  rev'g.  (1899),  2  Ch.  Div.  302.— Ed. 


282  THE  RIGHTS   OF    MEMBERSHIP. 

to  make  answer;  and  the  city  of  Oakland  filed  a  demurrer,  which 
was  sustained  by  the  court  and  the  bill  dismissed.  The  com- 
plainant appealed.  •  •       i. 

Two  grounds  of  demurrer  were  set  out  and  relied  on  m  the 
court  below,  and  are  urged  upon  us  on  this  appeal.     They  are:_ 

1.  That  appellant  has  shown  no  capacity  in  himself  to  maintain 
this'  suit,  the  injury,  if  any  exists,  being  to  the  interests  of  the 
corporation,  and  the  right  to  sue  belonging  solely  to  that  body. 

2.  That  by  a  sound  construction  of  the  law  under  which  the 
company  is  organized  the  city  of  Oakland  is  entitled  to  receive, 
free  of  compensation,  all  the  water  which  the  bill  charges  it  with 
so  using. 

The  first  of  these  causes  of  demurrer  presents  a  matter  of  very 
great  interest,  and  of  growing  importance  in  the  courts  of  the 
United  States. 

Since  the  decision  of  this  court  in  Dodge  v.  Woolsey  (i8  How. 
-^31),  the  principles  of  which  have  received  more  than  once  the 
approval  of  this  court,  the  frequency  with  which  the  most  ordi- 
nary and  usual  chancery  remedies  are  sought  in  the  Federal  courts 
by  a  single  stockholder  of  a  corporation  who  possesses  the  requi- 
site citizenship,  in  cases  where  the  corporation  whose  rights  are 
to  be  enforced  cannot  sue  in  those  courts,  seems  to  justify  a  con- 
sideration of  the  grounds  on  which  that  case  was  decided,  and  of 
the  just  limitations  of  the  exercise  of  those  principles. 

This  practice  has  grown  until  the  corporations  created  by  the 
laws  of  the  States  bring  a  large  part  of  their  controversies  ^yith 
their  neighbors  and  fellow-citizens  into  the  courts  of  the  United 
States  for  adjudication,  instead  of  resorting  to  the  State  courts, 
which  are  their  natural,  their  lawful,  and  their  appropriate  forum. 
It  is  not  difficult  to  see  how  this  has  come  to  pass.  A  corporation 
having  such  a  controversy,  which  it  is  foreseen  must  end  in  liti- 
gation, and  preferring  for  any  reason  whatever  that  this  litiga- 
tion shall  take  place  in  a  Federal  court,  in  which  it  can  neither 
sue  its  real  antagonist  nor  be  sued  by  it,  has  recourse  to  a  holder 
of  one  of  its  shares,  who  is  a  citizen  of  another  State.  This 
stockholder  is  called  into  consultation,  and  is  told  that  his  corpo- 
ration has  rights  which  the  directors  refuse  to  enforce  or  to 
protect.  He  instantly  demands  of  them  to  do  their  duty  in  this 
regard,  which  of  course  they  fail  or  refuse  to  do,  and  thereupon 
he  discovers  that  he  has  two  causes  of  action  entitling  him  to 
equitable  relief  in  a  court  of  chancery;  namely,  one  against  his 
own  company,  of  which  he  is  a  corporator,  for  refusing  to  do 
what  he  has  requested  them  to  do ;  and  the  other  against  the  party 
which  contests  the  matter  in  controversy  with  that  corporation. 
These  two  causes  of  action  he  combines  in  an  equity  suit  in  the 
Circuit  Court  of  the  United  States,  because  he  is  a  citizen  of  a 
different  State,  though  the  real  parties  to  the  controversy  could 
have  no  standing  in  that  court.  If  no  non-resident  stockholder 
exists,  a  transfer  of  a  few  shares  is  made  to  some  citizen  of  an- 


HAWES   V.    OAKLAND.  283 

Other  State,  who  then  brings  the  suit.  The  real  defendant  in  this 
action  may  be  quite  as  wilHng  to  have  the  case  tried  in  the  Fed- 
eral court  as  the  corporation  and  its  stockholder.  If  so,  he  makes 
no  objection,  and  the  case  proceeds  to  a  hearing.  Or  he  may  file 
his  answer  denying  the  special  grounds  set  up  in  the  bill  as  a 
reason  for  the  stockholder's  interference,  at  the  same  time  that 
he  answers  to  the  merits.  In  either  event  the  whole  case  is  pre- 
pared for  a  hearing  on  the  merits,  the  right  of  the  stockholder 
to  a  standing  in  equity  receives  but  little  attention,  and  the  over- 
burdened courts  of  the  United  States  have  this  additional  import- 
ant litigation  imposed  upon  them  by  a  simulated  and  conventional 
arrangement,  unauthorized  by  the  facts  of  the  case  or  by  the 
sound  principles  of  equity  jurisdiction. 

That  the  vast  and  increasing  proportion  of  the  active  business 
of  modern  life  which  is  done  by  corporations  should  call  into  ex- 
ercise the  beneficent  powers  and  flexible  methods  of  courts  of 
equity,  is  neither  to  be  wondered  at  nor  regretted;  and  this  is 
especially  true  of  controversies  growing  out  of  the  relations  be- 
tween the  stockholder  and  the  corporation  of  which  he  is  a 
member.  The  exercise  of  this  power  in  protecting  the  stockholder 
against  the  frauds  of  the  governing  body  of  directors  or  trustees, 
and  in  preventing  their  exercise,  in  the  name  of  the  corporation, 
of  powers  which  are  outside  of  their  charters  or  articles  of  asso- 
ciation, has  been  frequent,  and  is  most  beneficial,  and  is  undis- 
puted. These  are  real  contests,  however,  between  the  stockholder 
and  the  corporation  of  which  he  is  a  member. 

The  case  before  us  goes  beyond  this. 

This  corporation,  like  others,  is  created  a  body  politic,  and  cor- 
porate, that  it  may  in  its  corporate  name  transact  all  the  business 
which  its  charter  or  other  organic  act  authorizes  it  to  do. 

Such  corporations  may  be  common  carriers,  bankers,  insurers, 
merchants,  and  may  make  contracts,  commit  torts,  and  incur  lia- 
bilities, and  may  sue  or  be  sued  in  their  corporate  name  in  regard 
to  all  of  these  transactions.  The  parties  who  deal  with  them 
understand  this,  and  that  they  are  dealing  with  a  body  which  has 
these  rights  and  is  subject  to  these  obligations,  and  they  do  not 
deal  with  or  count  upon  a  liability  to  the  stockholder  whom  they 
do  not  know  and  with  whom  they  have  no  privity  of  contract  or 
other  relation. 

The  principle  involved  in  the  case  of  Dodge  v.  Woolsey  permits 
the  stockholder  in  one  of  these  corporations  to  step  in  between 
that  corporation  and  the  party  with  whom  it  has  been  dealing  and 
institute  and  control  a  suit  in  which  the  rights  involved  are  those 
of  the  corporation,  and  the  controversy  is  one  really  between  that 
corporation  and  the  other  party,  each  being  entirely  capable  of 
asserting  its  own  rights. 

This  is  a  very  diflferent  afifair  from  a  controversy  between  the 
shareholder  of  a  corporation  and  that  corporation  itself,  or  its 
managing  directors  or  trustees,  or  the  other  shareholder,  who  may 


284  THE   RIGHTS   OF   MEMBERSHIP. 

be  violating  his  rights  or  destroying  the  property  in  which  he  has 
an  interest.  Into  such  a  contest  the  outsider,  dealing  with  the 
corporation  through  its  managing  agents  in  a  matter  within  their 
authority,  cannot  be  dragged,  except  where  it  is  necessary  to 
prevent 'an  absolute  failure  of  justice  in  cases  which  have  been 
recognized  as  exceptional  in  their  character  and  calling  for  the 
extraordinary^  powers  of  a  court  of  equity.  It  is,  therefore,  al- 
ways a  question  of  equitable  jurisprudence,  and  as  such  has,  with- 
in the  last  forty  years,  received  the  repeated  consideration  of  the 
highest  courts  of  England  and  of  this  country. 

(The  learned  justice  proceeded  to  consider  Foss  v.  Harbottle,  2 
Hare,  461,  and  ]Mozley  v.  Alston,  i  Ph.  790.) 

These  cases  have  been  referred  to  again  and  again  in  the  Eng- 
lish courts  as  leading  cases  on  the  subject  to  which  they  relate, 
and  always  with  approval. 

In  Gray  v.  Lewis,  decided  in  1873,  Sir  W.  M.  James,  L.  J., 
said :  "I  am  of  opinion  that  the  only  person,  if  you  may  call  it 
a  person,  having  a  right  to  complain  was  the  incorporated  society 
called  Charles  Lafitte  &  Co.  In  its  corporate  character  it  w^as 
liable  to  be  sued  and  was  entitled  to  sue;  and  if  the  company 
sued  in  its  corporate  character,  the  defendant  might  allege  a 
release  or  a  compromise  by  the  company  in  its  corporate  char- 
acter— a  defense  which  would  not  be  open  in  a  suit  where  a  plain- 
tiff is  suing  on  behalf  of  himself  and  other  shareholders.  I  think 
it  is  of  the  utmost  importance  to  maintain  the  rule  laid  down  in 
]Mozley  v.  Alston  and  Foss  v.  Harbottle,  to  which,  as  I  under- 
stand, the  only  exception  is  where  the  corporate  body  has  got  into 
the  hands  of  directors,  and  of  the  majority,  which  directors  and 
majority  are  using  their  power  for  the  purpose  of  doing  some- 
thing fraudulent  against  the  minority,  who  are  overpowered  by 
them,  as  in  Atwood  v.  Alerryweather,  where  Vice-Chancellor 
Wood  sustained  a  bill  by  a  shareholder  on  behalf  of  himself  and 
others,  and  there  it  was  after  an  attempt  had  been  made  to  obtain 
proper  authority  from  the  corporate  body  itself  in  a  public  meet- 
ing assembled."     Law  Rep.  8  Ch.  App.  1035. 

But  perhaps  the  best  assertion  of  the  rule  and  of  the  excep- 
tions to  it  are  found  in  the  opinion  of  the  court  by  the  same 
learned  justice  in  AIcDougall  v.  Gardiner,  in  1875,  i  Ch.  D.  13. 
"I  am  of  opinion,"  he  says,  "that  this  demurrer  ought  to  be  al- 
lowed. I  think  it  is  of  the  utmost  importance  in  all  these  con- 
troversies that  the  rule  which  is  well  known  in  this  court  as  the 
rule  in  Mozley  v.  Alston,  and  Lord  v.  Copper  Miner's  Company, 
and  Foss  v.  Harbottle,  should  always  be  adhered  to;  that  is  to 
say,  that  nothing  connected  with  internal  disputes  between  share- 
holders is  to  be  made  the  subject  of  a  bill  by  some  one  shareholder 
on  behalf  of  himself  and  others,  unless  there  be  something  illegal, 
oppressive,  or  fraudulent ;  unless  there  is  something  ultra  vires 
on  the  part  of  the  company  qua  company,  or  on  the  part  of  the 
majority  of  the  company,  so  that  they  are  not  fit  persons  to  deter- 


HAWES  V.    OAKLAND.  285 

mine  it,  but  that  every  litigation  must  be  in  the  name  of  the  com- 
pany, if  the  company  really  desire  it.  Because  there  may  be  a 
great  many  wrongs  committed  in  a  company, — there  may  be  claims 
against  directors,  there  may  be  claims  against  officers,  there  rnay 
be  claims  against  debtors ;  there  may  be  a  variety  of  things  which 
a  company  may  well  be  entitled  to  complain  of,  but  which,  as  a 
matter  of  good  sense,  they  do  not  think  it  right  to  make  the  sub- 
ject of  litigation;  and  it  is  the  company,  as  a  company,  which 
has  to  determine  whether  it  will  make  anything  that  is  a  wrong 
to  the  company  a  subject-matter  of  litigation,  or  whether  it  will 
take  steps  to  prevent  the  wrong  from  being  done." 

The  cases  in  the  English  courts  are  numerous,  but  the  forego- 
ing citations  give  the  spirit  of  them  correctly. 

In  this  country  the  cases  outside  of  the  Federal  courts  are  not 
numerous,  and  while  they  admit  the  right  of  a  stockholder  to  sue 
in  cases  where  the  corporation  is  the  proper  party  to  bring  the 
suit,  they  limit  this  right  to  cases  where  the  directors  are  guilty 
of  a  fraud  or  a  breach  of  trust,  or  are  proceeding  ultra  vires. 
I\Iarsh  V.  Eastern  Railroad  Co.,  40  N.  H.  548;  Peabody  v.  Flint, 
6  Allen  (Mass.),  52.  In  Brewer  v.  Boston  Theater  (104  Mass. 
378),  the  general  doctrine  and  its  limitations  are  very  well  stated. 
See  also  Hersey  v.  Veazie,  24  Me.  9;  and  Samuel  v.  Holladay, 
I  Woolw.  400. 

The  case  of  Dodge  v.  Woolsey,  decided  in  this  court  in  1855, 
is,  however,  the  leading  case  on  the  subject  in  this  country. 

And  we  do  not  believe,  notwithstanding  some  expressions  in  the 
opinion,  that  it  is  justly  chargeable  with  the  abuses  w^e  have  men- 
tioned. It  was  manifestly  well  considered,  and  the  opinion  is 
unusually  long,  discussing  the  point  now  under  consideration  with 
a  full  reference  to  the  decisions  then  made  in  the  courts  of  Eng- 
land. The  suit — a  bill  in  chancery — was  brought  in  the  Circuit 
Court  for  the  District  of  Ohio,  by  Woolsey,  a  stockholder  of  the 
Commercial  Bank  of  Cleveland,  and  a  citizen  of  Connecticut, 
against  that  bank,  its  managing  directors,  and  Dodge,  tax  col- 
lector of  the  county  in  which  the  bank  was  situated,  citizens  of 
Ohio.  The  bill  alleged  that  Dodge  had  levied  upon  property  of 
the  bank  to  make  collection  of  a  tax,  which,  by  the  Constitution 
of  the  State  of  Ohio,  the  bank  was  bound  to  pay ;  that  in  that 
respect  the  Constitution,  then  recently  adopted,  impaired  the  obli- 
gation of  the  contract  of  the  State  with  the  bank,  contained  in 
its  charter.  It  appeared  in  the  case  that  Woolsey  had,  by  letter 
directed  to  the  board  of  directors,  requested  them  to  institute  pro- 
ceedings to  prevent  the  collection  of  this  tax ;  but  the  board,  by 
a  resolution,  declined  to  take  any  such  action,  while  expressing 
their  opinion  that  the  tax  was  illegal.  In  the  opinion  of  the  court, 
reciting  the  circumstances  which  justified  its  interposition  at  the 
suit  of  the  stockholder,  the  allegation  of  the  bill  is  adverted  to. 
that  if  the  taxes  are  enforced  it  will  annul  the  contract  with  the 
State  concerning  taxation,  and  that  the   tax  is  so   onerous  upon 


286  THE   RIGHTS   OF    MEMBERSHIP. 

the  bank  that  it  zvill  compel  a  suspension  and  final  cessation  of 
its  business.  The  following  extract  from  Angell  &  Ames  on  Cor- 
porations is  cited  with  approval:  "Though  the  result  of  the  au- 
thorities clearly  is  that  in  a  corporation,  when  acting  within  the 
scope  of,  and  in  obedience  to,  the  provisions  of  its  constitution, 
the  will  of  the  majority,  clearly  expressed,  must  govern,  yet  be- 
yond the  limits  of  the  act  of  incorporation  the  will  of  the  majority 
cannot  make  the  act  valid,  and  the  power  of  a  court  of  equity 
may  be  put  in  motion  at  the  instance  of  a  single  shareholder,  if 
he  can  show  that  the  corporation  are  employing  their  statutory 
powers  for  the  accomplishment  of  purposes  not  wnthin  the  scope 
of  their  institution.  Yet  it  is  to  be  observed  that  there  is  an 
important  distinction  between  this  class  of  cases  and  those  in 
which  there  is  no  breach  of  trust,  but  only  error  and  misappre- 
hension or  simple  negligence  on  the  part  of  the  directors."^  And 
the  court  adds:  "It  is  obvious  from  this  rule  that  the  circum- 
stances of  each  case  must  determine  the  jurisdiction  of  a  court 
of  equity  to  give  the  relief  sought." 

A  very  large  part  of  the  opinion  is  devoted  to  the  consideration 
of  the  high  function  of  this  court  in  construing  the  Constitution 
of  the  United  States,  and  it  is  impossible  not  to  see  the  influence 
on  the  mind  of  the  writer  of  that  opinion  of  the  fact  that  the 
only  question  on  the  merits  of  the  case  was  one  which  peculiarly 
belonged  to  the  Federal  judiciary,  and  especially  to  this  court  to 
decide ;  namely,  whether  the  Constitution  of  the  State  of  Ohio 
violated  the  obligation  of  the  contract  concerning  taxation  found 
in  the  charter  of  the  bank. 

As  the  law  then  stood  there  was  no  means  by  which  the  bank, 
being  a  citizen  of  the  same  State  with  Dodge,  the  tax  collector, 
could  bring  into  a  court  of  the  United  States  the  right  which  it 
asserted  under  the  Constitution,  to  be  relieved  of  the  tax  in  ques- 
tion, except  by  writ  of  error  to  a  State  court  from  the  Supreme 
Court  of  the  United  States. 

That  difficulty  no  longer  exists,  for  by  the  act  of  March  3. 
1875,  c.  137  (18  Stat.,  pt.  3,  p.  470),  all  suits  arising  under  the 
Constitution  or  laws  of  the  United  States  may  be  brought  orig- 
inally in  the  Circuit  Courts  of  the  United  States  without  regard 
to  the  citizenship  of  the  parties.  Under  this  statute,  if  it  had 
then  existed,  the  bank,  in  Dodge  v.  Woolsey,  could  undoubtedly 
have  brought  suit  to  restrain  the  collection  of  the  tax  in  its  own 
name,  without  resort  to  one  of  its  shareholders  for  that  purpose. 

And  this  same  statute,  while  enlarging  the  jurisdiction  of  the 
Circuit  Courts  in  cases  fairly  within  the  constitutional  grant  of 
power  to  the  Federal  judiciary,  strikes  a  blow,  by  its  fifth  section, 
at  improper  and  collusive  attempts  to  impose  upon  those  courts 
the  cognizance  of  cases  not  justly  belonging  to  them.  It  declares, 
if  at  any  time  in  the  progress  of  a  case,  either  originally  com- 
menced in  a  Circuit  Court,  or  removed  there  from  a  State  court, 
it  shall  appear  to  said  court  "that  such  suit  does  not  really  and 


HAWES   V.    OAKLAND.  287 

substantially  involve  a  dispute  or  controversy  properly  within  the 
jurisdiction  of  said  Circuit  Court,  or  that  the  parties  to  said  suit 
have  been  improperly  or  coUusively  made  or  joined,  either  as 
plaintiffs  or  defendants,  for  the  purpose  of  creating  a  case  cog- 
nizable or  removable  under  this  act,  the  said  Circuit  Court  shall 
proceed  no  further,  but  shall  dismiss  the  suit  or  remand  it  to  the 
court  from  which  it  was  removed." 

It  is  believed  that  a  rigid  enforcement  of  this  statute  by  the 
Circuit  Courts  would  relieve  them  of  many  cases  which  have  no 
proper  place  on  their  dockets. 

This  examination  of  Dodge  v.  Woolsey  satisfies  us  that  it  does 
not  establish,  nor  was  it  intended  to  establish,  a  doctrine  on  this 
subject  different  in  any  material  respect  from  that  found  in  the 
cases  in  the  English  and  in  other  American  courts,  and  that  the 
recent  legislation  of  Congress  referred  to  leaves  no  reason  for 
any  expansion  of  the  rule  in  that  case  beyond  its  fair  interpreta- 
tion. 

We  understand  that  doctrine  to  be  that  to  enable  a  stockholder 
in  a  corporation  to  sustain  in  a  court  of  equity  in  his  own  name. 
a  suit  founded  on  a  right  of  action  existing  in  the  corporation 
itself,  and  in  which  the  corporation  itself  is  the  appropriate  plain- 
tiff, there  must  exist  as  the  foundation  of  the  suit — 

Some  action  or  threatened  action  of  the  managing  board  of 
directors  or  trustees  of  the  corporation  which  is  beyond  the  au- 
thority conferred  on  them  by  their  charter  or  other  source  of  or- 
ganization ; 

Or  such  a  fraudulent  transaction  completed  or  contemplated  by 
the  acting  managers,  in  connection  with  some  other  party,  or 
among  themselves,  or  with  other  shareholders  as  will  result  in 
serious  injury  to  the  corporation,  or  to  the  interests  of  the  other 
shareholders ; 

Or  where  the  board  of  directors,  or  a  majority  of  them,  are 
acting  for  their  own  interest,  in  a  manner  destructive  of  the  cor- 
poration itself,  or  of  the  rights  of  the  other  shareholders; 

Or  where  the  majority  of  shareholders  themselves  are  oppres- 
sively and  illegally  pursuing  a  course  in  the  name  of  the  corpora- 
tion, which  is  in  violation  of  the  rights  of  the  other  shareholders, 
and  which  can  only  be  restrained  by  the  aid  of  a  court  of  equity. 

Possibly  other  cases  may  arise  in  which,  to  prevent  irremedia- 
ble injury,  or  a  total  failure  of  justice,  the  court  would  be  justi- 
fied in  exercising  its  powers,  but  the  foregoing  may  be  regarded 
as  an  outline  of  the  principles  which  govern  this  class  of  cases. 

But.  in  addition  to  the  existence  of  grievances  which  call  for 
this  kind  of  relief,  it  is  equally  important  that  before  the  share- 
holder is  permitted  in  his  own  name  to  institute  and  conduct  a 
litigation  which  usually  belongs  to  the  corporation,  he  should 
show  to  the  satisfaction  of  the  court  that  he  has  exhausted  all  the 
means  within  his  reach  to  obtain,  within  the  corporation  itself,  the 
redress   of  his  grievances,  or  action  in  conformity  to  his  wishes. 


288  THE  RIGHTS   OF    MEMBERSHIP. 

He  must  make  an  earnest,  not  a  simulated  effort,  with  the  man- 
aging body  of  the  corporation,  to  induce  remedial  action  on  their 
part,  and  this  must  be  made  apparent  to  the  court.  If  time  per- 
mits or  has  permitted,  he  must  show,  if  he  fails  with  the  directors, 
that  he  has  made  an  honest  effort  to  obtain  action  by  the  stock- 
holders as  a  body,  in  the  matter  of  which  he  complains.  And  he 
must  show  a  case,  if  this  is  not  done,  where  it  could  not  be  done, 
or  it  was  not  reasonable  to  require  it. 

The  efforts  to  induce  such  action  as  complainant  desires  on  the 
part  of  the  directors,  and  of  the  shareholders  when  that  is  neces- 
sary, and  the  cause  of  failure  in  these  efforts  should  be  stated 
with  particularity,  and  an  allegation  that  complainant  was  a  share- 
holder at  the  time  of  the  transactions  of  which  he  complains,  or 
that  his  shares  have  devolved  on  him  since  by  operation  of  law, 
and  that  the  suit  is  not  a  collusive  one  to  confer  on  a  court  of  the 
United  States  jurisdiction  in  a  case  of  which  it  could  otherwise 
have  no  cognizance,  should  be  in  the  bill,  which  should  be  verified 
by  affidavit. 

It  is  needless  to  say  that  appellant's  bill  presents  no  such  case 
as  we  have  here  supposed  to  be  necessary  to  the  jurisdiction  of 
the  court. 

He  merely  avers  that  he  requested  the  president  and  directors 
to  desist  from  furnishing  water  free  of  expense  to  the  city,  ex- 
cept in  case  of  fire  or  other  great  necessity,  and  that  they  de- 
clined to  do  as  he  requested.  No  correspondence  on  the  subject 
is  given.  No  reason  for  declining.  We  have  here  no  allegation 
of  a  meeting  of  the  directors,  in  which  the  matter  was  formally 
laid  before  them  for  action.  No  attempt  to  consult  the  other 
shareholders  to  ascertain  their  opinions,  or  to  obtain  their  action. 
But  within  five  days  after  his  application  to  the  directors  this  bill 
is  filed.  There  is  no  allegation  of  fraud  or  of  acts  ultra  vires,  or 
of  destruction  of  property,  or  of  irremediable  injury  of  any  kind. 

Conceding  appellant's  construction  of  the  company's  charter  to 
be  correct,  there  is  nothing  which  forbids  the  corporation  from 
dealing  with  the  city  in  the  manner  it  has  done.  That  city  con- 
ferred on  the  company  valuable  rights  by  special  ordinance ; 
namely,  the  use  of  the  streets  for  laying  its  pipes,  and  the  privi- 
lege of  furnishing  water  to  the  whole  population.  It  may  be  the 
exercise  of  the  highest  wisdom  to  let  the  city  use  the  water  in 
the  manner  complained  of.  The  directors  are  better  able  to  act 
understandingly  on  this  subject  than  a  stockholder  residing  in 
New  York.  The  great  body  of  the  stockholders  residing  in  Oak- 
land or  other  places  in  California  may  take  this  view  of  it,  and 
be  content  to  abide  by  the  action  of  their  directors. 

If  this  be  so,  is  a  bitter  litigation  with  the  city  to  be  conducted 
by  one  stockholder  for  the  corporation  and  all  other  stockholders, 
because  the  amount  of  his  dividends  is  diminished? 

This  question  answers  itself,  and  without  considering  the  other 
point  raised  by  the  demurrer,  we  are  of  opinion  that  it  was  prop- 


RABE    V.    DUNLAP,  289 

erly  sustained,  and  the  bill  dismissed,  because  the  appellant  shows 
no  standing  in  a  court  of  equity — no  right  in  himself  to  prosecute 
this  suit. 

Decree  affirmed.^ 


RABE  V.  DUNLAP. 

1893.     51   N.  J.  Eq.  40,  25  Atl.  959. 

Rights  of  Stockholders — Relief  Against   Ultra   Vires  Acts — 

Laches. 

VAN  FLEET,  V.  C. :  This  is  an  application  for  an  injunction. 
The  application  is  resisted  on  the  ground  that  the  complainants 
have,  by  their  laches,  lost  all  right  to  either  temporary  or  per- 
manent relief ;  the  contention  being  that  they  are  not  entitled  to 
an  injunction  now,  nor  can  any  relief  be  given  to  them  on  final 
hearing.  The  only  question,  however,  before  the  court  at  this 
time,  is  whether  or  not  an  injunction  should  issue.  The  facts  to 
be  considered  in  deciding  this  question  are  almost  entirely  free 
from  dispute. 

The  particular  property  which  the  complainants  ask  to  have 
protected  is  shares  of  stock  issued  to  them  by  the  Lake  Hopat- 
cong  Land  &  Improvement  Company,  a  corporation  organized 
under  the  laws  of  this  state  in  August,  1885,  with  a  capital  of 
$50,000,  divided  into  500  shares  of  $100  each.  Only  249  of  the 
500  shares  appear  to  have  been  issued,  and  of  these  one  of  the 
complainants  holds  5  shares,  and  the  other  6.  The  principal 
purposes   for  which  the  corporation  was  organized  were  to  buy 

"Following'  the  decision  in  the  principal  case,  the  Supreme  Court  of 
the  United  States,  on  Jan.  23,  1882,  promulgated  Equity  Rule  No.  94 
(see  Preface,  IX,  of  104  U.  S.),  which  constitutes  the  basis  of  the  new 
Equity  Rule  No.  27,  promulgated  Nov.  4,   1912,  viz. — 

"27. — Stockholder's  Bill. — Every  bill  brought  by  one  or  more  stock- 
holders in  a  corporation  against  the  corporation  and  other  parties, 
founded  on  rights  which  may  properly  be  asserted  by  the  corporation, 
must  be  verified  by  oath,  and  must  contain  an  allegation  that  the  plain- 
tifif  was  a  shareholder  at  the  time  of  the  transaction  of  which  he  com- 
plains, or  that  his  share  had  devolved  on  him  since  by  operation  of  law, 
and  that  the  suit  is  not  a  collusive  one  to  confer  on  a  court  of  the 
United  States  jurisdiction  of  a  case  of  which  it  would  not  otherwise 
have  cogni;^ance.  It  must  also  set  forth  with  particularity  the  efforts 
of  the  plaintiff  to  secure  such  action  as  he  desires  on  the  part  of  the 
managing  directors  or  trustees,  and,  if  necessary,  of  the  shareholders, 
and  the  causes  of  his  failure  to  obtain  such  action,  or  the  reasons  for 
not  making  such  effort." 

See,  also,  Detroit  v.  Dean  (1882),  106  U.  S.  537,  27  L.  ed.  300.  1  Sup. 
Ct.  560  (approving  the  principal  case);  Corbus  v.  Alaska  &c.  Min.  Co. 
(1902),  187  U.  S.  455.  23  Sup.  Ct.  157,  47  L.  ed.  256:  Delaware  &  Hudson 
Co.  v.  Albany  &c.  R.  Co.  (1909),  213  U.  S.  435,  29  Sup.  Ct.  540,  53  L. 
ed.  862.— Ed. 

19 — Private  Corp. 


290  THE   RIGHTS   OF    MEMBERSHIP. 

and  sell  land,  and  erect  buildings,  on  and  about  Lake  Hopatcong. 
Some  of  the  persons  interested  in  this  corporation,  organized 
three  others — one  on  the  15th  day  of  January,  1886,  called  the 
Lake  Hopatcong  Hotel  Company,  the  purposes  of  which  were  to 
buy  land,  and  erect  hotels,  cottages  and  other  appropriate  structures 
thereon,  and  to  carry  on  the  business  of  an  innkeeper;  another 
on  the  29th  day  of  June,  1886,  called  the  Lake  Hopatcong  Trans- 
portation &  Steamboat  Company,  the  purpose  of  which  was  to 
carry  on  the  business  of  transporting  passengers  and  merchandise 
for  hire;  and  the  third,  on  the  14th  day  of  March,  1887,  called 
the  Hotel  Breslin  Villa  Company,  the  purposes  of  which  were  to 
buy  land,  and  erect  hotels  and  other  buildings  thereon,  and  lease 
and  sell  the  same.  On  the  17th  day  of  April,  1888,  a  statute  was 
passed,  making  it  lawful  for  two  or  more  corporations  organized 
under  the  general  laws  of  this  state,  and  formed  "for  all  or  any 
of  the  following  purposes:  The  improvement  and  sale  of  lands; 
the  construction,  maintenance  and  operation  of  hotels,  and  carry- 
ing on  the  business  of  an  innkeeper;  and  the  transportation  of 
merchandise  and  passengers  upon  land  and  water" — to  consolidate 
and  merge  their  corporate  rights,  franchises,  powers,  and  privi- 
leges into  a  single  corporation,  so  that  all  the  property,  rights, 
franchises,  and  privileges  by  law  vested  in  the  several  corporations 
should,  by  the  consolidation,  be  transferred  to  and  vested  in  the 
corporation  created  by  the  consolidation.  P.  L.  1888,  p.  441. 
This  statute  took  effect  immediately.  It  prescribes  with  particu- 
larity the  "conditions  and  restrictions"  to  be  performed  and  ob- 
served in  consolidating  two  or  more  corporations.  For  the  pur- 
])Oses  of  this  discussion,  it  is  unnecessary  to  state  what  these 
conditions  and  restrictions  are,  further  than  to  say  that  no  con- 
solidation can  be  made  until  all  of  the  corporations  proposing  to 
consolidate  have  entered  into  an  agreement,  under  the  corporate 
seals,  prescribing  the  terms  and  conditions  of  the  consolidation, 
and  the  mode  of  carrying  the  same  into  effect,  nor  until  the  agree- 
ment so  made  has  been  submitted  to  the  stockholders  of  each  of 
the  corporations  separately,  at  a  meeting  called  for  that  purpose, 
and  has  been  sanctioned  and  approved  by  a  majority  of  the  shares 
])resent  at  such  meeting. 

Almost  immediately  after  the  enactment  of  this  statute  the 
four  corporations  just  described  consolidated  under  its  authority. 
The  corporation  so  created  is  called  the  Breslin  Hotel  &  Land 
Company.  The  agreement  to  consolidate  was  made  by  the  four 
corporations  on  the  4th  day  of  May,  1888,  and  was  sanctioned 
and  approved  by  their  respective  stockholders,  in  the  manner 
])rescribed  by  the  statute,  at  a  meeting  held  on  the  31st  day  of 
the  same  month.  Of  the  249  shares  issued  by  the  corporation  in 
which  the  complainants  held  stock,  184  were  represented  at  the 
meeting  of  the  stockholders  of  that  corporation,  and  voted  in 
favor  of  consolidation.  The  complainants  did  not  attend  the 
meeting,    nor    was    their    stock    represented    there,    though    it    is 


RABE    V.    DUN  LAP.  '  29 1 

admitted  that  they  had  notice  of  the  meeting,  and  its  object,  and 
also  knew  that  a  committee  appointed  by  the  four  corporations 
to  consider  the  expediency  of  amalgamation  had  made  a  report 
as  early  as  February,  1888,  in  favor  of  consolidation.  It  is  un- 
disputed that  the  consolidation  agreement  conforms  in  all  respects 
to  the  requirements  of  the  statute,  and  also  that  every  act  which 
the  statute  requires  to  be  done  in  order  to  make  such  an  agree- 
ment valid  and  effectual  was  done  in  this  case.  The  agreement, 
together  with  the  sanction  and  approval  of  the  stockholders,  was 
filed  in  the  office  of  the  secretary  of  state  on  the  13th  day  of 
September,  1888.  By  force  of  the  statute,  such  filing  made  the 
consolidation  complete,  and  transformed  the  four  distinct  corpo- 
rate entities  into  one.  The  property  of  the  four  corporations  was 
thereupon  conveyed  to  the  new  corporation,  the  Breslin  Hotel  & 
Land  Company.  The  consolidation  agreement  provided  that  the 
stockholders  of  the  corporation  in  which  the  complainants  held 
stock  should  have  the  right  to  exchange  their  stock,  share  for 
share,  for  the  preferred  stock  of  the  new  corporation.  Such  pre- 
ferred stock  entitled  its  holder  to  a  preferential  dividend  of  six 
per  cent,  annually.  The  complainants  were  notified  by  a  written 
notice  that  they  had  a  right  to  exchange  their  stock  for  preferred 
stock  of  the  new  corporation,  and  also  that  a  stockholders'  meet- 
ing for  the  election  of  directors  of  the  new  corporation  would  be 
held  in  Hoboken  on  the  loth  day  of  October,  1888.  They  paid 
no  attention  to  the  notice.  The  new  corporation  was  on  the  day 
appointed  organized,  and  proceeded  at  once  to  make  contracts 
and  incur  obligations,  and  to  carry  on  the  various  enterprises 
and  ventures  which  the  four  corporations  had  previously  con- 
ducted separately.  Between  the  loth  day  of  October,  1888,  and 
the  2ist  day  of  October,  1889,  the  defendant,  Robert  Dunlap, 
loaned  and  advanced  to  the  new  corporation  over  $22,000.  He 
also,  on  the  25th  day  of  November,  1889,  indorsed  for  its  accom- 
modation a  note  for  $r 0,000,  and  another  of  the  same  amount  on 
the  13th  day  of  December,  1889,  both  of  which  he  has  since  been 
compelled  to  pay.  To  secure  Mr.  Dunlap  for  what  was  due  to 
him  for  moneys  loaned  and  advanced,  and  also  to  protect  him 
against  the  liability  he  had  incurred  in  indorsing  the  two  notes, 
the  new  corporation  executed  four  mortgages  to  him  on  the  27th 
day  of  December,  1889 — two  on  its  real  estate  and  the  other  two 
on  its  chattels.  Some  of  the  land  so  conveyed  in  pledge  is  land 
which  prior  to  the  consolidation  belonged  to  the  corporation  in 
which  the  complainants  hold  stock,  and  which  after  the  consolida- 
tion was  conveyed  to  the  new  corporation  in  performance  of  the 
consolidation  agreement.  On  the  date  when  these  mortgages 
were  executed  it  is  not  disputed  that  there  was  over  $24,000  due 
to  Mr.  Dunlap  for  loans  and  advances  to  the  new  corporation. 
Nor  is  it  disputed  that  there  is  now  a  further  sum  of  over 
$18,000  due  to  him  for  money  paid  for  the  new  corporation,  in 
discharging  the   liability   he   incurred   in   indorsing   the   two   notes. 


292  THE  RIGHTS   OF    MEMBERSHIP. 

In  March,  1892,  a  suit  was  brought  in  this  court  by  Mr.  Dunlap 
to  foreclose  his  mortgages.  No  defense  was  made.  A  decree 
pro  confesso  has  been  entered,  and  a  reference  ordered;  and  the 
case,  in  respect  to  the  matters  referred,  is  now  pending  before  the 
master.  After  the  order  of  reference  was  made  one  of  the  com- 
plainants in  this  suit  was  allowed  to  intervene  in  that,  with  the 
right  to  make  any  defense  which  either  of  the  defendants  could 
have  made. 

It  is  at  this  point  in  the  history  of  the  new  corporation  that 
the  complainants  for  the  first  time,  ask  for  judicial  protection  of 
their  rights;  and  the  relief  they  now  seek  is  of  the  most  destruc- 
tive kind  to  every  right  and  interest  standing  opposed  to  their 
interests.  They  ask  to  have  the  new  corporation  ripped  up  from 
bottom  to  top,  and  that  everything  which  it  has  done  affecting 
their  rights  may  be  undone.  Stated  in  detail,  what  they  ask  is 
this:  That  the  new  corporation  may  be  declared  to  have  been 
void  from  the  beginning;  that  the  deed  by  which  the  property  of 
the  corporation  in  which  they  are  interested  was  conveyed  to  the 
new  corporation  may  be  declared  to  be  a  nullity,  and  that  the 
property  conveyed  by  it  may  be  restored  to  the  grantor,  or  to  a 
trustee  to  be  appointed  for  that  purpose;  that  the  new  corpora- 
tion may  be  required  to  account  for  all  property  of  their  corpora- 
tion which  it  has  disposed  of;  that  the  mortgages  of  the  defend- 
ant may  be  decreed  to  be  no  lien  on  the  land  which  their  corpora- 
tion conveyed  to  the  new  corporation,  and  that  he  may,  in  addi- 
tion, be  commanded  and  required  to  execute  a  release,  releasing 
such  land  from  the  operation  of  his  mortgages;  and  that  in  the 
meantime,  and  as  preliminary  to  the  principal  relief  sought,  the 
further  prosecution  of  his  foreclosure  suit  in  this  court  may  be 
stayed  or  restrained. 

That  the  conveyance  by  the  complainants'  corporation  of  all  of 
its  property  to  the  new  corporation,  for  the  purpose  of  appro- 
priating it  to  new  and  different  purposes  from  those  for  which 
the  grantor  corporation  held  it,  was  without  power  or  right,  and 
a  plain  misappropriation  of  the  property,  as  against  non-assenting 
stockholders,  is  a  proposition  that  was  not  disputed  on  the  argu- 
ment. It  cannot  be.  It  is  incontestable.  The  stockholders  of  a 
corporation  have  an  indisputable  right  to  have  the  property  of 
the  corporation  applied  and  used  exclusively  for  the  purposes 
specified  in  its  charter,  and  any  attempt  by  its  managers  to  ap- 
propriate it  to  any  other  purpose  is  a  usurpation  of  power,  and 
a  violation  of  the  rights  of  the  stockholders.  No  rule  of  law  is 
better  settled  than  that  which  declares  that  a  corporation  created 
by  statute,  either  special  or  general,  can  exercise  no  power,  and 
has  no  rights,  except  such  as  are  granted  by  express  words  or 
fair  implication;  and  in  the  construction  of  such  grants  the  rule 
is  well  settled  that  it  must  be  held  that  what  is  fairly  implied  is 
as  much  granted  as  what  is  clearly  expressed.  By  the  charter  of 
the  complainants'  corporation,  its  managers  are  given  no  power 


RABE    V.    DUNLAP.  293 

whatever  to  carry  on  the  business  of  an  innkeeper  or  that  of  a 
common  carrier,  or  to  embark  the  property  of  the  corporation 
in  such  or  hke  enterprises.  They  are  radically  different  from, 
and  wholly  foreign  to,  the  purposes  specified  in  its  charter.  The 
complainants  were  not  deprived  of  their  stock,  or  any  of  their 
rights,  by  the  statute  of  1888.  It  is  beyond  the  power  of  the 
legislature  to  take  away  or  destroy  a  vested  right.  Private  prop- 
erty may  be  taken  for  public  use  on  just  compensation,  but  the 
use  here  was  in  no  sense  a  public  use.  The  only  effect  which 
can,  in  my  judgment,  be  given  to  this  statute  in  this  case,  is  to 
hold  that  it  made  the  new  corporation  a  valid  corporation  as  to 
those  who  should  deal  with  it,  and  as  against  assenting  stock- 
holders, but  it  is  left  to  the  rights  of  the  nonassenting  stock- 
holders in  full  vigor,  and  unimpaired.  There  can  be  no  doubt, 
therefore,  that  had  the  complainants  applied  for  an  injunction 
promptly,  and  while  it  was  in  the  power  of  the  court  to  extend 
protection  to  them  without  doing  wrong  or  injustice  to  others,  it 
would  have  been  granted.  A  corporation  holds  its  property  as 
the  trustee  of  its  stockholders,  and  they,  like  any  other  cestui 
que  trust,  have  a  right  to  have  the  trust  property  judiciously  and 
honestly  managed,  and  preserved  from  waste  and  misappropria- 
tion. But  stockholders  to  be  entitled  to  the  summary  interfer- 
ence of  the  court  in  cases  where  they  seek  protection  against 
acts  which  are  merely  in  excess  of  the  power  of  the  corporation, 
and  are  not  prohibited  by  law,  must  be  diligent.  They  must 
apply  so  recently  after  the  doing  of  the  act  of  which  they  com- 
plain that  the  court  may  stop  or  undo  the  wTong  to  them  without 
doing  equal  or  greater  wrong  to  some  other  person.  The  princi- 
ple which  must  control  the  action  of  a  court  of  equity  in  cases 
where  the  defense  is  laches  was  laid  down  by  Lord  Camden, 
many  years  ago,  in  these  words:  "Nothing  can  call  forth  the 
activity  of  a  court  of  equity  but  conscience,  good  faith  and  rea- 
sonable diligence.  Where  these  are  wanting  the  court  is  passive, 
and  does  nothing.  Laches  and  neglect  are  always  discounte- 
nanced, and  therefore,  from  the  beginning  of  this  jurisdiction, 
there  was  always  a  limitation  to  suits  in  equity."  Smith  v. 
Clay,  reported  in  a  note  to  Deloraine  v.  Browne,  3  Brown,  Ch. 
639,  2  Amb.  645.  This  principle  as  it  is  applied  to  stockholders 
who  are  tardy  in  seeking  protection  against  acts  ultra  vires  of 
the  corporation,  was  expressed  by  Sir  John  Romilly,  master  of 
the  rolls,  in  Gregory  v.  Patchett,  33  Beav.  595,  602,  in  this  form: 
"Shareholders  cannot  lie  by,  sanctioning,  or  by  their  silence  at 
least  acquiescing  in,  an  arrangement  which  is  ultra  vires  of  the 
company  to  which  they  belong;  watching  the  result, — if  it  be 
favorable  and  profitable  to  themselves,  to  abide  by  it,  and  insist 
on  its  validity;  but,  if  it  piove  unfavorable  and  disastrous,  then  to 
institute  proceedings  to  set  it  aside."  And  Lord  Justice  Turner's 
statement  of  the  rule  is  equallv  pertinent  to  the  case  in  hand. 
In  Great  Western  Ry.  Co.  v.  Oxford,  W.  &  W.  Ry.  Co.,  3  De 


294  THE  RIGHTS   OF    MEMBERSHIP. 

Gex.  M.  &  G.  341,  359,  he  said:  "Where  the  summary  interfer- 
ence of  this  court  is  invoked,  in  cases  of  this  nature,  it  must  be 
invoked  promptly.  Parties  who  have  lain  by  and  permitted  a 
large  expenditure  to  be  made,  in  contravention  of  the  rights  for 
which  they  contend,  cannot  call  upon  the  court  for  its  summary 
interference.  The  jurisdiction  to  interfere  is  purely  equitable, 
and  it  must  be  governed  by  equitable  principles.  One  of  the  first 
of  those  principles  is  that  parties  coming  into  equity  must  do 
equity,  and  this  principle  more  than  reaches  to  cases  of  this 
description.  If  parties  cannot  come  into  equity  without  submit- 
ting to  do  equity  a  fortiori  they  cannot  come  for  the  summary 
interference  of  the  court  when  their  conduct  before  coming  has 
been  such  as  to  prevent  equity  being  done."  The  cases  in  which 
this  principle  as  it  is  applied  to  stockholders,  has  been  discussed, 
are  numerous.  The  doctrine  they  establish  is  that  where  an  act 
is  done  openly,  and  especially  on  notice,  and  without  evil  intent, 
though  clearly  in  excess  of  the  power  of  the  corporation,  a  non- 
assenting  stockholder  will  not  be  allowed  to  pause  to  speculate 
upon  the  chances — to  wait  until  he  can  see  whether  such  act  is 
likely  to  result  in  profit  or  loss — but,  to  be  entitled  to  the  sum- 
mary interference  of  the  court,  he  must  ask  for  it  promptly,  and 
before  the  act  of  which  he  complains  has  become  the  foundation 
of  rights  or  equities  which  must  be  destroyed,  or  greatly  im- 
paired, if  the  act  be  nullified  or  undone.  Or,  stated  with  greater 
brevity,  and  in  its  simple  essence,  the  rule  is  this:  If  he  wants 
protection  against  the  consequences  of  an  ultra  vires  act,  he  must 
ask  for  it  with  sufficient  promptness  to  enable  the  court  to  do 
justice  to  him  without  doing  injustice  to  others.  Kent  v.  Mining 
Co.,  78  N.  Y.  159;  Shelden  Hat-Blocking  Co.  v.  Eickemeyer 
Hat-Blocking  Mach.  Co.,  90  N.  Y.  607;  Watts'  Appeal,  78  Pa. 
St.  370;  Kitchen  v.  Railroad  Co.,  69  Mo.  224;  Taylor  v.  Rail- 
road Co.,  4  Woods,  575,  13  Fed.  Rep.  152;  Graham  v.  Railroad 
Co.,  2  Macn.  Sa  G.   146. 

This  principle  must  control  the  decision  of  the  present  applica- 
tion. No  argument  is  required  to  show  its  pertinency.  When 
the  leading  facts  of  the  case  are  recalled,  it  applies  itself. 
Whether  the  complainants  remained  inactive,  to  speculate  upon 
the  chances,  intending  to  abide  by  the  consolidation  if  it  resulted 
in  benefit,  and,  if  not,  to  try  to  undo  it,  it  is  manifest  that  they 
acted  precisely  as  they  would  have  done  if  such  had  been  their 
intention.  Although  they  were  fully  informed  of  each  step  in  the 
consolidation  scheme,  from  its  inception  to  its  completion,  and 
also  of  the  fact  that  the  new  corporation  had  been  organized, 
and  was  actively  engaged  in  the  prosecution  of  the  several  enter- 
prises which  had  previously  been  carried  on  by  the  four  corpora- 
tions separately,  yet  for  over  three  years  they  remained  passive 
and  inactive,  and  did  nothing;  and  it  is  not  until  the  new  cor- 
poration has  become  insolvent,  and  all  of  its  property  is  about 
to    be    sold    to    pay    mortgages    which    were    made    and    accepted 


CONTINENTAL    SECURITIES    CO.    V.    BELMONT.  295 

while  they  were  apparently  assenting  to  the  amalgamation,  and 
all  its  consequences,  that  they  seek  to  have  the  consolidation 
broken  up,  and  the  property  of  the  corporation  in  which  they 
are  interested  restored  to  it.  They  laid  by  until  the  new  venture 
proved  disastrous,  and  then,  for  the  first  time,  they  ask  the  court 
to  undo  what  for  over  three  years  they  had,  by  their  inaction 
and  delay,  been  apparently  assenting  to.  Acquiescence  or  tacit 
assent,  in  such  cases,  was  defined  by  Judge  Folger  in  Kent  v. 
Mining  Co.,  supra,  to  mean  neglect  to  promptly  and  actively 
condemn  the  unauthorized  act  by  suit.  More  than  a  year  elapsed 
between  the  formation  of  the  new  corporation  and  the  execution 
of  the  four  mortgages  to  the  defendant.  If  the  validity  of  the 
new  corporation  had  been  promptly  challenged  by  suit,  it  is  al- 
most absolutely  certain  that  the  debts  secured  by  those  mortgages 
would  not  have  been  contracted.  Neither  the  mortgages  or  the 
debts  would  have  then  existed.  As  it  is,  those  mortgages  are 
unquestionably  good  and  valid  as  against  the  assenting  stock- 
holders. It  is  probable  that  237  out  of  the  249  shares  have  as- 
sented. It  is  certain  that  184  have.  In  this  situation  of  afifairs 
it  is  obvious,  to  arrest  the  defendant's  foreclosure  suit  will  pre- 
vent him  at  least  for  the  present,  from  enforcing  that  part  of  his 
security  which  is  good  beyond  question ;  and  this  must  be  done, 
if  done  at  all,  to  protect  the  complainants  in  the  enjovment  of  a 
right  small  in  both  extent  and  value,  compared  with  that  of  the 
defendant,  and  which  it  is  not  at  all  certain  they  have  not  irre- 
trievably lost  by  their  laches.  The  complainants,  in  my  judgment, 
occupy  the  position  described  by  Lord  Justice  Turner  when  he 
said :  "Suitors  cannot  come  for  the  summary  interference  of  the 
court  when  their  conduct  before  coming  has  been  such  as  to  pre- 
vent equity  being  done."  The  complainants'  application  will  be 
denied,  with  costs. 


CONTINENTAL   SECURITIES   CO    v.   BELMONT. 

1912.     206  N.  Y.  7.  99  N.  E.  138. 

Stockholders'  Suit. 

Action  by  the  Continental  Securities  Company  and  Clarence  H. 
Venner,  stockholders  in  the  Interborough  Rapid  Transit  Com- 
pany, on  behalf  of  themselves  and  of  other  stockholders  similarlv 
situated,  and  on  behalf  of  the  company,  against  August  Belmont 
and  others,  impleaded  with  the  Interborough  Rapid  Transit  Com- 
pany. From  an  order  of  the  Appellate^  Division,  affirming  an 
order  denying  a  motion  by  certain  of  the  defendants  for  judg- 
ment upon  the  pleadings,  defendants,  other  than  the  Interborough 
Rapid   Transit   Company,  appeal   by  permission. 


296  THE  RIGHTS   OF    MEMBERSHIP. 

CHASE,  J. — This  is  a  representative  action  derived  from  the 
Interborough  Rapid  Transit  Company.  It  is  brought  in  behalf  of 
the  plaintiffs  and  all  others  similarly  interested,  as  stockholders  of 
said  company,  against  the  directors  of  said  company  and  said 
company  to  require  said  individual  defendants  to  account  to  said 
company  for  fifteen  thousand  shares  of  its  capital  stock,  alleged 
to  have  been  issued  fraudulently  and  illegally,  and  without  any 
valid  or  adequate  consideration  therefor,  but  upon  an  alleged  con- 
sideration that  was  a  pretense  and  subterfuge  and  intended  to 
cover  a  gift  or  bonus  to  the  defendants  Belmont  and  Luttgen, 
and  their  nominees,  and  also  to  require  said  individual  defendants 
to  account  for  the  dividends  which  have  been  paid  on  said  stock. 
It  is  alleged  that  by  reason  of  the  facts  set  forth  in  the  com- 
plaint the  defendant  corporation  has  suffered  damage  to  an 
amount  exceeding  $4,500,000.  Each  of  the  defendants  answered 
the  complaint,  and,  after  the  answers  were  interposed,  a  motion 
was  made  for  judgment  upon  the  pleadings  dismissing  the  com- 
plaint pursuant  to  section  547  of  the  Code  of  Civil  Procedure, 
which  motion  was  denied.  An  appeal  was  taken  therefrom  to  the 
Appellate  Division,  where  the  order  denying  said  motion  was 
unanimously  affirmed.  Leave  was  granted  by  the  Appellate  Di- 
vision to  the  defendants,  other  than  the  defendant  company,  to 
appeal  to  this  court,  and  the   following  questions  were  certified: 

"(i)   Does  the  complaint  state  a  cause  of  action? 

"(2)  Was  the  motion  of  the  defendants  for  judgment  against 
the  plaintiffs  on  the  pleadings  rightfully  denied?" 

As  the  opinion  will  not  discuss  the  complaint  generally,  but  only 
in  connection  with  the  objections  that  are  made  to  it  by  the  ap- 
pellants in  this  court,  it  is  unnecessary  to  state  its  provisions  ex- 
cept as   required  in  considering  such  objections. 

It  appears  from  the  complaint  that  each  of  the  plaintiffs  pur- 
chased his  stock  subsequently  to  the  transactions  complained  of  in 
the  complaint.  This  court  in  the  recent  case  of  Pollitz  v.  Gould, 
202  N.  Y.  II,  94  N.  E.  1088,  has  definitely  determined  that  a 
stockholder  may  bring  an  action  in  behalf  of  the  corporation  for 
the  benefit  of  himself  and  all  other  stockholders  to  set  aside  as 
fraudulent  an  improper  transaction  consummated  at  the  expense 
of  the  corporation  before  he  acquired  his  stock. 

It  is  alleged  that  the  15,000  shares  of  stock  were  issued  pur- 
suant to  a  resolution  unanimously  adopted  by  the  directors  of 
said  company,  of  which  the  following  is  a  copy,  viz. :  "Resolved 
that  this  company  do  purchase  of  August  Belmont  &  Company 
one  thousand  nine  hundred  and  seventy-five  (1,975)  shares  of  the 
capital  stock  of  the  Pelham  Park  Railroad  Company  of  the  par 
value  of  twenty-five  dollars  ($25)  per  share;  one  thousand  nine 
hundred  and  thirty-five  (1,935)  shares  of  the  capital  stock  of 
the  City  Island  Railroad  Company  of  the  par  value  of  twenty-five 
dollars  ($25)  per  share;  and  twenty-seven  thousand  five  hundred 
dollars  ($27,500)  in  the  first  mortgage  bonds  of  the  Pelham  Park 


CONTINENTAL    SECURITIES    CO.    V.    BELMONT.  297 

Railroad  Company,  for  the  sum  of  one  million  five  hundred 
thousand  dollars  ($1,500,000)  to  be  paid  by  the  issue  and  delivery 
of  fifteen  thousand  (15,000)  shares  of  the  par  value  of  one  hun- 
dred dollars  ($ioo)  each  in  the  full-paid  non-assessable  capital 
stock  of  this  company,  to  such  persons  and  in  such  amounts  as 
the  said  August  Belmont  &  Company  may  direct ;  which  said  sum 
is  also  to  cover  full  compensation  to  the  said  August  Belmont  & 
Company  for  their  services  in  procuring  the  assignment  of  the 
contract  between  John  B.  McDonald  and  the  city  of  New  York 
aforesaid,  the  sale  to  this  company  of  the  stock  of  the  Rapid 
Transit  Subway  Construction  Company  and  the  subscriptions  to 
the  remainder  of  the  capital  stock  of  this  company."  It  is  fur- 
ther alleged  that  the  statement  in  said  resolution  in  substance  that 
said  15,000  shares  of  stock  was  to  be  issued  and  delivered  in 
part  to  cover  full  compensation  for  certain  alleged  services  ren- 
dered by  the  defendants  Belmont  and  Luttgen  was  a  pretense  and 
subterfuge  designed  and  intended  to  cover  up  the  real  transaction 
which  was  (except  as  to  the  actual  cost  of  said  stock  and  bonds 
of  said  railroad  companies,  namely,  $32,185.97)  a  gift  or  bonus 
to  said  defendants  Belmont  and  Luttgen  and  their  nominees  of 
said  stock  in  the  defendant  company. 

The  appellants  assert  that  the  complaint  is  fatally  defective 
because  it  does  not  offer  to  return  the  stock  and  bonds  described 
in  said  resolution.  The  action  is  not  brought  for  a  rescission  of 
the  contract  with  August  Belmont  &  Co.,  but  for  an  accounting. 
The  plaintiffs  are  not  in  possession  of  said  stocks  and  bonds,  and 
as  individual  stockholders  are  unable  through  no  fault  of  theirs 
to  return  them.  The  plaintiffs  do  not  bring  this  action  because 
their  rights  have  been  directly  violated  or  because  the  cause  of 
action  is  theirs,  or  because  they  are  entitled  to  the  relief  sought. 
They  are  permitted  to  sue  in  this  manner  simply  in  order  to  set 
in  motion  the  judicial  machinery  of  the  court.  Pomeroy's  Equity 
Jurisprudence,  §  1095.  The  court  in  the  action  can  preserve  and 
adjust  the  equities  of  the  parties  to  it.  Thompson  on  Corpora- 
tions (2d  ed.),  §  4568;  2  IMechem  on  Corporations,  §  1179;  Kley 
V.  Healy,  127  N.  Y.  555,  28  N.  E.  593;  s.  c.  149  N.  Y.  346,  44 
N.  E.  150;  Pritz  V.  Jones,  117  App.  Div.  643,  102  N.  Y.  Supp. 
549;  Heckscher  v.  Edenborn,  203  N.  Y.  210,  96  N,  E.  441.  The 
actual  value  of  said  stocks  and  bonds  can  be  found  in  the  action, 
and,  if  equity  requires  it,  the  defendant  corporation  can  be  di- 
rected to  return  such  stocks  and  bonds  to  said  August  Belmont 
&  Co. 

It  was  not  necessary  for  the  plaintiffs  to  allege  in  the  com- 
plaint that  their  predecessors  in  title  did  not  assent  to  or  acquiesce 
in  the  alleged  fraudulent  issue  of  said  15,000  shares  of  stock.  It 
is  not  necessary  to  negative  such  assent  or  acquiescence  in  a  fraud, 
unless  it  is  otherwise  to  be  presumed  from  the  delay  in  bringing 
the  action  or  generally  from  the  allegations  of  the  complaint.  If 
it  exists,  it  is  a  matter  of  defense.     Sage  v.  Culver,   147  N.  Y. 


298  THE  RIGHTS   OF    MEMBERSHIP. 

241,  41  N.  E.  513;  Pollitz  V.  Gould,  supra.  If  the  rule  were 
otherwise,  the  objection  to  the  complaint  would  not  avail  the  de- 
fendants in  this  case  because  the  allegations  of  the  complaint 
amount  to  a  negative  of  any  assent  by  the  plaintiffs  or  their 
predecessors  in  title  to  the  transactions  alleged  in  the  complaint. 

It  is  also  claimed  by  the  appellants  that  it  does  not  appear  from 
the  complaint  that  the  defendant  corporation  and  its  board  of 
directors  were  requested  to  bring  suit  to  recover  said  fifteen  thou- 
sand shares  of  stock  or  the  value  thereof,  or  that  said  corporation 
or  said  board  of  directors  neglected  or  refused  to  bring  such 
action.  It  appears  from  the  complaint  that  on  the  12th  day  of 
March,  19 10,  the  plaintiff  corporation,  then  being  the  owner  of 
the  stock  now  owned  by  the  two  plaintiffs,  delivered  to  the  de- 
fendant corporation  and  to  its  officers  and  directors  a  written 
communication  directed  to  said  defendant  corporation  and  its 
president  and  directors,  calling  attention  to  the  fact  of  the  issue 
and  delivery  of  said  15,000  shares  of  capital  stock  for  a  grossly 
inadequate  and  illegal  consideration,  and  requesting  and  demand- 
ing that  suit  be  brought  in  behalf  of  the  corporation  and  in  good 
faith  prosecuted  against  the  incorporators  of  said  company  and 
members  of  its  board  of  directors  during  the  year  1902  and  said 
firm  of  August  Belmont  &  Co.  to  recover  the  damages  suffered 
by  reason  of  the  action  of  the  said  incorporators  and  directors. 

Said  written  communication  also  stated  and  provided  as  follows : 
"We  hereby  offer  to  properly  indemnify  the  Interborough  Rapid 
Transit  Company  against  any  damage  or  costs  it  may  sustain  as 
a  result  of  bringing  and  prosecuting  such  suit.  A  copy  of  this 
letter  is  mailed  to  each  director  of  the  Interborough  Rapid  Transit 
Company.  Unless  within  ten  days  from  date  you  advise  us  that 
the  request  and  demand  herein  will  be  complied  with  we  shall 
conclude  that  you  refuse."  Thereafter  the  plaintiffs  waited  until 
May  4,  1910,  when,  no  action  having  been  commenced  and  no 
response  having  been  made  to  said  written  communication,  this 
action  was  commenced. 

Upon  the  facts  so  alleged  the  plaintiffs  treated  the  defendant 
corporation  and  its  board  of  directors  as  having  refused  and  neg- 
lected to  bring  such  action  and  the  allegations  relating  thereto 
are  sufficient  to  sustain  the  complaint.  Kavanaugh  v.  Common- 
wealth Trust  Co.,  103  App.  Div.  95,  92  N.  Y.  Supp.  543. 

On  this  appeal  as  on  the  motion  at  the  Special  Term  and  on 
the  hearing  of  the  appeal  in  the  Appellate  Division  the  allegations 
of  the  complaint  are  taken  as  true. 

It  is  conceded  that  an  action  in  equity  cannot  be  maintained  by 
the  plaintiffs  as  individual  stockholders  for  themselves  and  all 
others  similarly  interested,  unless  it  is  necessary  because  of  the 
neglect  and  refusal  of  the  corporate  body  to  act. 

It  is  necessary,  therefore,  in  an  action  by  the  plaintiffs  to  set 
forth  two  things :  First,  a  cause  of  action  in  favor  of  the  cor- 
poration with  the  same  detail  of  facts  as  would  be  proper  in  case 


CONTINENTAL    SECURITIES    CO.    V.    BELMONT.  299 

tlie  corporation  itself  had  brought  the  action;  second,  the  facts 
which  entitle  the  plaintiff  to  maintain  the  action  in  place  of  the 
corporation.  Kavanaugh  v.  Commonwealth  Trust  Co.,  i8i  N.  Y. 
121,  73  N.  E.  562;  O'Connor  v.  Virginia  Passenger  &  Power  Co., 
184  N.  Y.  46,  76  N.  E.  1082.  It  is  not  seriously  contended  that 
the  complaint  does  not  state  a  good  cause  of  action  in  favor  of 
the  defendant  corporation.  It  is  insisted  by  the  defendants  that 
it  was  necessary  for  the  plaintiffs,  in  addition  to  alleging  a  de- 
mand upon  the  defendant  corporation  and  its  board  of  directors 
to  bring  the  action  and  their  neglect  and  refusal  to  do  so,  to  al- 
lege that  they  had  given  notice  of  the  alleged  fraud  to  the  body 
of  stockholders  of  the  defendant  corporation,  and  had  demanded 
of  said  stockholders  that  some  action  be  taken  by  them  to  redress 
the  wrong,  and  that  such  body  of  stockholders  had  neglected  and 
refused  to  take  any  action  relating  thereto.  The  cause  of  action 
belongs  to  the  corporate  body  and  not  to  the  plaintiffs  and  other 
stockholders  individually,  nor  to  the  body  of  stockholders  collec- 
tively. 

The  board  of  directors  represents  the  corporate  body.  It  is 
provided  by  statute  in  this  state  that  the  affairs  of  every  corpora- 
tion shall  be  managed  by  its  board  of  directors.  General  Corpo- 
ration Law  (Consol.  Laws  1909,  c.  23),  §  34.  The  directors  are 
not  ordinary  agents  in  the  immediate  control  of  the  stockholders. 
The  directors  hold  their  office  charged  with  the  duty_  to  act  for 
the  corporation  according  to  their  best  judgment,^  and  in  so  doing 
they  cannot  be  controlled  in  the  reasonable  exercise  and  perform- 
ance of  such  duty.  The  corporation  is  the  owner  of  the  property, 
but  the  directors  in  the  performance  of  their  duty  possess  it  and 
act  in  every  way  as  if  they  owned  it.  People  ex  rel.  Manice  v. 
Powell,  201  N.  Y.  194,  94  N.  E.  634.  They  are  trustees  clothed 
with  the  power  of  controlling  the  property  and  managing  the 
affairs  of  a  corporation  without  let  or  hindrance.  As  to  third 
persons  they  are  its  agents,  but  as  to  the  corporation  itself  equity 
holds  them  liable  as  trustees.  2  Pomeroy's  Equity  Jurisprudence. 
§§  1061,  1073,  1088,  1097;  People  ex  rel.  Manice  v.  Powell,  supra. 
"  The  claim  of  the  appellants  that  the  body  of  stockholders  has 
some  immediate  or  direct  authority  to  act  for  the  corporation  or 
to  control  the  board  of  directors  in  the  matters  set  forth  in  the 
complaint  is  based  upon  an  erroneous  conception  of  the  duties 
and  powers  of  the  body  of  stockholders  in  this  state. 

As  a  general  rule,  stockholders  cannot  act  in  relation  to  the 
ordinary  "business  of  a  corporation.  The  body  of  stockholders 
have  certain  authority  conferred  by  statute  which  must  be  exer- 
cised to  enable  the  corporation  to  act  in  specific  cases,  but  except 
for  certain  authority  conferred  by  statute,  which  is  mainly  per- 
missive or  confirmatory,  such  as  consenting  to  the  mortgage,  lease, 
or  sale  of  real  property  of  the  corporation,  they  have  no  express 
power  given  by  statute.  They  are  not  by  any  statute  in  this  state 
given  general  power  of  initiative  in  corporate  affairs.     Any  action 


30O  THE  RIGHTS   OF    MEMBERSHIP, 

by  them  relating  to  the  details  of  the  corporate  business  is  nec- 
essarily in  the  form  of  an  assent,  request,  or  recommendation. 
Recommendations  by  a  body  of  stockholders  can  only  be  enforced 
through  the  board  of  directors,  and  indirectly  by  the  authority  of 
the  stockholders  to  change  the  personnel  of  the  directors  at  a 
meeting  for  the  election  of  directors.  Such  action  may  or  may 
not  result  in  securing  adequate,  corporate  action  with  reference 
to  illegal  or  fraudulent  acts.  For  reasons  wholly  apart  from  the 
matter  in  dispute,  the  stockholders  may  not  desire  to  change  a 
majority  of  the  persons  comprising  its  board  of  directors.  Some 
of  the  reasons  why  the  power  vested  in  stockholders  to  elect  di- 
rectors is  inadequate  as  a  remedy  for  specific  fraudulent  acts  are 
stated  by  Cook  in  his  work  on  Stock  and  Stockholders,  §  740,  in 
which  he  says :  "There  has  been  considerable  discussion  as  to 
whether  the  stockholder  in  addition  to  his  request  to  the  corporate 
officers  to  institute  the  suit  should  not  also  be  required  to  attempt 
to  induce  the  stockholders  in  meeting  assembled  to  take  action 
by  directing  the  directors  to  bring  suit,  or  by  refusing  to  re-elect 
them  at  the  next  election.  The  facts,  however,  that  the  stock- 
holders in  meeting  assembled  cannot  control  the  discretion  of  the 
directors  in  bringing  such  a  suit,  that  the  remedy  of  refusing  to 
re-elect  them  involves  delay,  and  the  assumption  that  a  minority 
of  the  stockholders  can  by  the  election  control  such  a  suit,  that 
irreparable  injury  or  the  vesting  of  great  financial  interests  may 
occur  in  the  meantime,  and  that  laches  may  arise  as  a  bar  to  the 
stockholder's  suit,  have  settled  the  rule  that  the  stockholder's  re- 
quest to  the  corporate  directors  to  institute  the  suit  is  sufficient. 
He  need  not  also  apply  to  a  stockholders'  meeting."  Although  it 
is  said  that  the  authority  of  stockholders  in  the  management  of 
business  corporations  is  exhausted  when  they  elect  the  directors 
(Thompson  on  Corporations  [2d  Ed.],  §  11 78),  nevertheless  it 
is  generally  recognized  that  certain  acts  of  boards  of  directors 
that  are  legal,  but  voidable,  can  be  ratified  and  confirmed  by  a 
majority  of  the  body  of  stockholders  as  the  ultimate  parties  in 
interest  and  thus  make  them  binding  upon  the  corporation.  JMora- 
wetz  on  Corporations  (2d  Ed.),  §§  625,  626.  Such  recognized 
authority  in  stockholders  to  ratify  and  confirm  the  acts  of  boards 
of  directors  is  confined  to  acts  voidable  by  reason  of  irregulari- 
ties in  the  make-up  of  the  board  or  otherwise  or  by  reason  of  the 
directors  or  some  of  them  being  personally  interested  in  the  sub- 
ject-matter of  the  contract  or  act,  or  for  some  other  similar  rea- 
son which  makes  the  action  of  the  directors  voidable.  No  such 
authority  exists  in  case  of  an  act  of  the  board  of  directors  which 
is  prohibited  by  law  or  which  is  against  public  policy.  Kent  v. 
Quicksilver  Mining  Co.,  78  N.  Y.  159. 

In  any  case  where  action  is  taken  by  stockholders  confirming 
and  ratifying  a  fraud  and  misapplication  of  the  funds  of  the  cor- 
poration by  the  directors  or  others  the  action  is  binding  only  by 
way  of  estoppel  upon  such  stockholders  as  vote  in  favor  of  such 


CONTINENTAL    SECURITIES    CO.    V.    BELMONT.  3OI 

approval.  Morawetz  on  Corporations  (2d  Ed.),  §  625.  The  dis- 
tinction between  acts  that  can  and  those  that  cannot  be  confirmed 
and  ratified  is  shown  in  the  report  of  two  frequently  cited  Eng- 
lish decisions,  namely,  Foss  v.  Harbottle,  2  Hare,  461,  and  Bag- 
shaw  V.  Eastern  Union  Railway  Co.,  7  Hare,  114.  The  former 
of  these  cases  was  limited  to  the  approval  of  a  legal  but  voidable 
act.  In  the  Bagshaw  Case,  where  the  directors  of  a  corporation 
had  misapplied  or  were  about  to  misapply  certain  moneys  of  the 
corporation,  the  court  say:  "No  majority  of  the  shareholders, 
however  large,  could  sanction  the  misapplication  of  this  portion 
of  the  capital.  A  single  dissenting  voice  would  frustrate  the 
wishes  of  the  majority.  Indeed,  in  strictness,  even  unanimity 
would  not  make  the  act  lawful.  This  appears  to  me  to  take  it 
out  of  the  case  of  Foss  v.  Harbottle,  to  which  I  was  referred. 
That  case  does  not,  I  apprehend,  upon  this  point,  go  further  than 
this:  That  if  the  act,  though  it  be  the  act  of  the  directors  only, 
be  one  which  a  general  meeting  of  the  company  could  sanction, 
a  bill  by  some  of  the  shareholders  on  behalf  of  themselves  and 
others,  to  impeach  that  act,  cannot  be  sustained,  because  a  general 
meeting  of  the  company  might  immediately  confirm  and  give 
validity  to  the  act  of  which  the  bill  complains." 

It  is  the  governing  body  or  bodies  of  a  corporation  with  power 
to  enforce  a  remedy  to  whom  complaining  stockholders  must  go 
with  their  demand  for  relief.  The  governing  body  of  corpora- 
tions in  this  state,  as  we  have  seen,  is  the  board  of  directors.  A 
complaining  stockholder  must  go  to  such  board  for  relief  before 
he  can  bring  an  action,  unless  it  clearly  appears  by  the  complaint 
that  such  application  is  useless.  If  the  subject-matter  of  the 
stockholder's  complaint  is  for  any  reason  within  the  immediate 
control,  direction,  or  power  of  confirmation  of  the  body  of  stock- 
holders, it  should  be  brought  to  the  attention  of  such  stockholders 
for  action,  before  an  action  is  commenced  by  a  stockholder  unless 
it  clearly  appears  by  the  complaint  that  such  application  is  useless. 
The  decision  reported  in  Hawes  v.  Oakland,  104  U.  S.  450,  26 
L.  Ed.  827,  and  other  similar  decisions  in  the  federal  and  state 
courts  are  not  in  conflict  with  the  decision  about  to  be  rendered 
herein.  In  such  cases,  as  in  this  case,  it  is  asserted  that  an  ap- 
plication to  the  body  of  stockholders  is  unnecessary  when  it  is 
unreasonable  to  require  it.  If  the  body  of  stockholders  has  no 
adequate  power  or  authority  to  remedy  the  wrong  asserted  by 
the  individual  stockholders,  it  is  unreasonable  and  unnecessary  to 
require  an  application  to  it  to  redress  the  wrong  before  bringing 
a  representative  action.  See  opinion  of  Carr,  J,,  in  the  Appellate 
Division  herein  (Sup.),  134  N.  Y.  Supp.  635.  See,  also,  Dela- 
ware &  H.  Co.  v.  Albany  &  S.  R.  R.  Co.,  213  U.  S.  435-  29  Sup. 
Ct.  540,  53  L.  Ed.  862.  In  this  case,  where  the  plaintift'  alleges 
fraud  and  a  substantial  misappropriation  of  15,000  shares  of  the 
stock  of  the  corporation  through  a  nominal  purchase  of  property 


2p2.  THE  RIGHTS   OF    MEMBERSHIP. 

and  the  payment  of  a  pretended  claim  for  services,  application  to 
the  body  of  stockholders  was  not  necessary. 

It  is  claimed  by  the  respondents  that  the  complaint  discloses 
such  a  state  of  facts  as  would  dispense  with  the  necessity  of  mak- 
ing any  demand  either  upon  the  corporation,  its  board  of  direct- 
ors, or  the  body  of  stockholders  before  bringing  an  action  to  re- 
cover for  the  company  the  value  of  the  15,000  shares  of  stock 
alleged  to  have  been  illegally  and  fraudulently  issued  to  the  indi- 
vidual  defendants. 

We  have  not  considered  the  allegations  of  the  complaint  with 
reference  to  such  claim  of  the  respondents. 

The  order  should  be  affirmed,  with  costs,  and  each  of  the  ques- 
tions certified  answered  in  the  affirmative. 

CuUen,  C.  J.,  and  Gray,  Haight,  Vann,  Werner,  and  Willard 
Bartlett,  JJ.,  concur. 

Order  affirmed.^ 

^Cf.     Sage  V.  Culver  (1895),  147  N.  Y.  241,    41  N.  E.  513. 

"As  a  general  rule  courts  have  nothing  to  do  with  the  internal  man- 
agement of  business  corporations.  Whatever  may  lawfully  be  done  by 
the  directors  or  stockholders,  acting  through  majorities  prescribed  by 
law,  must  of  necessity  be  submitted  to  by  the  minority,  for  corporations 
can  be  conducted  upon  no  other  basis.  All  questions  within  the  scope 
of  the  corporate  powers  which  relate  to  the  policy  of  administration,  to 
the  expediency  of  proposed  measures,  or  to  the  consideration  of  con- 
tracts, provided  it  is  not  so  grossly  inadequate  as  to  be  evidence  of 
fraud,  are  beyond  the  province  of  the  courts.  The  minority  directors 
or  stockholders  can  not  come  into  court  upon  allegations  of  a  want  of 
judgment  or  lack  of  efficiency  on  the  part  of  the  majority  and  change 
the  course  of  administration.  Corporate  elections  furnish  the  only 
remedy  for  internal  dissensions,  as  the  majority  must  rule  so  long  as 
it  keeps  within  the  powers  conferred  by  the  charter. 

"To  these  general  rules,  however,  there  are  some  exceptions,  and  the 
most  important  is  that  founded  on  fraud.  While  courts  can  not  compel 
directors  or  stockholders,  proceeding  by  the  vote  of  a  majority,  to  act 
wisely,  they  can  compel  them  to  act  honestly,  or  undo  their  work  if 
they  act  otherwise.  Where  a  majority  of  the  directors,  or  stockholders, 
or  both,  acting  in  bad  faith,  carry  into  effect  a  scheme  which,  even  if 
lawful  upon  its  face,  is  intended  to  circumvent  the  minority  stockholders 
and  defraud  them  out  of  their  legal  rights,  the  courts  interfere  and 
remedy  the  wrong.  Action  on  the  part  of  directors  or  stockholders, 
pursuant  to  a  fraudulent  scheme  designed  to  injure  the  other  stock- 
holders, will  sustain  an  action  by  the  corporation,  or,  if  it  refuses  to 
act,  by  a  stockholder  in  its  stead  for  the  benefit  of  all  the  injured  stock- 
holders." Vann,  J.,  in  Flynn  v.  Brooklyn  City  R.  Co.  (1899),  158  N.  Y. 
493,  at  pp.  507-8,  53  N.  E.  520.  ,^    ,,^  ^„  .. 

See,  also,  Niles  v.  N.  Y.  Central  &c.  R.  Co.  (1903),  176  N.  Y.  119,  68  N. 
E.  142;  lacobson  v.  Brooklyn  Lumber  Co.  (1906),  184  N.  Y  152,  76  N. 
E.  1075;' Continental  Ins.  Co.  v.  N.  Y.  &c.  R.  Co.  (1907),  18/.  N.  Y  225 
79  N.  E.  1026;  Pollitz  v.  Wabash  R.  Co.  (1912),  150  App.  Div.  (N.  Y.) 
715,  135  N.  Y.  S.  785,  modified  (1912),  207  N.  Y.  113,  100  N.  E.  721. 

NOTE   ON    stockholders'    DERIVATIVE    SUITS. 

In  a  stockholder's  suit,  the  corporation  is  a  necessary  party  defend- 
ant.    Davenport  v.  Dows  (1873),  18  Wall.  (U.  S.)  626,  21  L.  ed.  938. 


CONTINENTAL    SECURITIES    CO.    V.    liELMONT.  3O3 

The  misconducting  directors  must  also  be  parties.  Edwards  v.  Bay- 
State  Gas.  Co.  (1898),  91  Fed.  942. 

The  corporation,  although  the  real  plaintiff,  is  not  regarded  as  such 
for  the  purposes  of  jurisdiction  of  the  United  States  courts.  Doctor  v. 
Harrington  (1904),  196  U.  S.  579,  at  pp.  587-589,  25  Sup.  Ct.  355,  49 
L.  ed.  606. 

The  plaintiff  must  make  out  a  cause  of  action  in  favor  of  the  cor- 
poration, where  suing  in  a  representative  capacity.  Waters  v.  Waters 
&  Co.  (1911),  201  N.  Y.  184,  94  N.  E.  602. 

The  plaintiff  must  sue  on  behalf  of  himself  and  all  other  stockholders, 
as  representative  of  their  aggregate  rights.  McAfee  v.  Zettler  (1897), 
103  Ga.  579,  30  S.  E.  268.— Ed. 


CHAPTER  XIII. 

TRANSFER    OF    SHARES. 

LUND  V.  WHEATON  ROLLER  MILL  CO. 

1893.     50  Minn.  36,  52  N.  W.  268,  36  Am.  St.  623. 

Sale  of  Slock — Necessity  for  Transfer  on  the  Books  of  the  Cor- 
poration— Attachment. 

DICKINSON,  J.:  The  defendant,  the  Wheaton  Roller  Mill 
Company,  is  a  corporation  created  under  the  Gen.  St.  of  1878, 
c.  34,  title  2.  In  June,  1890,  one  Howell  owned  and  held  40 
shares  of  the  stock  of  the  corporation,  certificates  for  which  had 
been  issued  to  him.  At  that  time  he  in  good  faith  and  for  a 
valuable  consideration  sold  and  assigned  such  stock  to  the  inter- 
vener, the  Grant  County  Bank,  but  no  entry  of  such  transfer  was 
made  in  the  books  of  the  mill  company. 

In  November,  in  the  same  year,  in  an  action  prosecuted  by  the 
plaintiffs  against  Howell — who  appeared  on  the  books  of  the  cor- 
poration as  being  still  the  owner  of  the  stock — the  stock  was 
levied  upon  by  virtue  of  a  writ  of  attachment.  The  plaintiffs 
then  had  no  knowledge  that  the  stock  had  been  transferred  by 
Howell.  Afterwards  the  plaintiffs  recovered  judgment  in  the 
action  against  Howell,  and  under  execution  issued  thereon,  in 
December,  1890,  the  stock  was  levied  on  and  sold,  the  plaintiffs 
being  the  purchasers.  The  plaintiffs  had  notice  of  the  inter- 
vener's claim  when  the  levy  was  made  under  the  execution.  The 
sole  question  to  which  attention  will  be  directed  is  whether  by 
force  of  the  statute  the  sale  and  assignment  of  the  stock  to  the 
bank  by  Howell  was  not  ineffectual  as  to  attaching  creditors  of 
the  assignor,  by  reason  of  the  fact  that  no  entry  of  the  transfer 
had  been  made  on  the  books  of  the  corporation. 

The  statute  referred  to  is  §  8,  t.  i,  c.  34,  Gen.  St.  1878,  which 
by  force  of  section  no  of  the  same  chapter  (section  46,  c.  34, 
G.  St.  1866)  is  made  applicable  with  respect  to  corporations  or- 
ganized under  title  2.  It  is  in  terms  as  follows:  "The  transfer 
of  shares  is  not  valid,  except  as  between  the  parties  thereto,  until 
it  is  regularly  entered  on  the  books  of  the  company,  so  far  as  to 
show  the  names  of  the  persons  by  and  to  whom  transferred,  the 
numbers  or  other  designation  of  the  shares,  and  the  date  of  the 
transfer.  *  *  *  -phe  books  of  the  company  shall  be  so  kept  as 
to  show  intelligibly  the  original  stockholders,  their  respective  in- 
terests, the  amount  which  has  been  paid  in  on  their  shares,  and 
all  transfers  thereof;  and  such  books  or  a  correct  copy  thereof, 

304 


LUND  V.   WHEATON    ROLLER    MILL   CO.  305 

SO  far  as  the  items  mentioned  in  this  section  are  concerned,  shall 
be  subject  to  the  inspection  of  any  person  desiring  the  same." 
It  is  also  provided  by  §  114,  c.  34,  Gen.  St.  1878  (§  49,  c.  34, 
Gen.  St.  1866),  that  "the  stock  of  any  such  corporation  shall  be 
deemed  personal  property,  and  be  transferable  only  on  the  books 
of    such    corporation,    in    such    form    as    the    directors    prescribe. 

The  law  cannot  be  said  to  be  generally  settled  and  uniform  as 
to  whether  an  unregistered  sale  and  transfer  of  stock,  which 
either  by  statute  or  charter  is  declared  to  be  transferable  only 
on  the  books  of  the  corporation,  is  effectual  to  pass  the  property 
as  against  subsequent  attaching  creditors  of  the  vendor.  The 
decisions  are  contradictory.  But  we  do  not  feel  ourselves  at  lib- 
erty to  now  treat  the  question  as  a  new  one  in  this  state.  As 
early  as  Alay,  1879,  in  the  case  of  Baldwin  v.  Canfield,  26  Minn. 
43,  I  N,  ^W.  Rep.  261,  it  was  held  that  an  unregistered  transfer 
of  stock  in  pledge  to  secure  indebtedness  of  the  pledgor  was  ef- 
fectual. This  decision  was  cited  and  followed  in  Joslin  v.  St. 
Paul  Distilling  Co.,  44  Minn.  183,  47  N.  W.  Rep.  337.  The  court 
in  Baldwin  v.  Canfield,  referring  to  the  above-cited  §  49,  ch.  39, 
Gen.  St.  1866,  said:  "Provisions  of  this  kind  are  intended  solely 
for  the  protection  and  benefit  of  the  corporation;  they  do  not 
incapacitate  a  shareholder  from  transferring  his  stock  without 
any  entry  upon  the  corporation  books.  [Citing  authorities.]  Ex- 
cept as  against  the  corporation,  the  owner  and  holder  of  shares 
of  stock  may,  as  an  incident  of  this  right  of  property,  transfer 
the  same  as  any  other  personal  property  of  which  he  is  the 
owner."  It  is  true  that  the  court  made  no  reference  to  section  8 
of  that  chapter,  which  by  a  force  of  section  46,  Gen.  St.  1866, 
became  a  part  of  the  law  concerning  corporations  created  under 
title  2.  An  examination  of  the  briefs  in  that  case  shows  that  the 
latter  section  was  not  referred  to,  and  it  seems  probable  that  the 
attention  of  the  court  was  not  directed  to  it.  When  the  structure 
of  the  statute  is  observed,  it  will  be  seen  that  both  counsel  and 
court  might  naturally  fail  to  discover  the  applicability  to  title  2 
of  this  section  8,  found  in  title  i,  and  relating  to  a  subject  spe- 
cifically treated  of  in  section  49.  title  2.  However  that  may  be. 
and  even  if  a  consideration  of  the  provisions  of  section  8  might 
possibly  have  led  to  a  dift'erent  conclusion  as  to  the  validity  "of 
the  pledge,  that  decision,  made  nearly  13  years  ago,  and  hitherto 
unquestioned,  should  now  be  deemed  decisive  of  the  question.  It 
has  probably  been  generally  so  regarded,  and  it  is  believed  that 
transfers  of  stocks  in  pledge  and  by  sale  have  been  extensively 
made,  without  having  the  transaction  entered  on  the  books  of  the 
corporations.  The  rule  of  stare  decisis  should  deter  us  from  now 
declaring  the  statute  law  to  be  different  from  what  it  has  hereto- 
fore been  pronounced  to  be.  We  therefore  follow  former  deci- 
sions, without  entering  upon  a  consideration  of  the  construction 
which  might  be  given  to  section  8  of  the  statute  if  the  question 
20 — Private  Corp. 


306  TR.\NSFER    OF    SHARES. 

were  a  new  one.  In  deciding  the  case  in  this  way,  we  would  not 
be  understood  as  expressing  the  opinion  that  a  proper  construc- 
tion of  the  statute  would  lead  to  a  different  conclusion.  The 
tendency  of  many  decisions  is  in  accordance  with  the  rule  here- 
tofore announced  in  this  court,  and  now  followed.  See  Robinson 
V.  Bank,  94  N.  Y.  637;  McNeil  v.  Bank,  46  N.  Y.  325,  331,  and 
cases  cited;  Finney's  Appeal,  59  Pa.  St.  398;  Turnpike  Co.  v. 
Gerhab  (Pa.  Sup.),  13  Atl.  Rep.  90;  Bank  v.  McElrath,  13  N. 
J.  Eq.  24;  Hunderdon  Co.  Bank  v.  Nassau  Bank,  17  N.  J.  Eq. 
497 ;  Thurber  v.  Crumb,  86  Ky.  408,  6  S.  W.  Rep.  145 ;  Conti- 
nental Nat.  Bank  v.  Eliot  Nat.  Bank,  7  Fed.  Rep.  369;  Cook, 
Stocks,  §  487. 
Judgment   affirmed. 


EAST  BIRMINGHAM  LAND  CO.  v.  DENNIS. 

1888.     85  Ala.  565,  5  So.  317.  2  L.  R.  A.  836,  7  Am.  St.  73. 

Fraudulent  Transfer  of  Shares — Innocent  Purchaser. 

SOMERVILLE,  J. :  We  concur  in  the  conclusion  reached  by 
the  judge  of  the  city  court,  that  the  appellee,  Dennis,  complain- 
ant in  the  bill,  is  the  owner  of  the  ten  shares  of  stock  which  are 
the  subject  of  litigation  in  the  present  suit.  The  testimony  sat- 
isfactorily proves  that  the  certificate  of  stock,  indorsed  in  blank 
by  Dearborn,  wdio  was  the  owner  on  the  books  of  the  defendant 
corporation,  was  the  property  of  the  appellee,  and  was  taken  or 
stolen  from  his  possession  without  any  negligence  on  his  part 
whatever,  several  months  before  it  was  purchased  by  the  de- 
fendant Mudd,  who  innocently  bought  and  paid  value  for  it  some 
time  in  March,   1888. 

The  only  question  is  whether  Mudd,  who  paid  full  value  for 
this  stock,  without  notice  of  the  complainant's  claim  to  it,  ac- 
quired a  title  superior  to  that  of  complainant. 

The  established  rule  is  that  no  person  can  ordinarily  be  de- 
prived of  his  ownership  of  property  save  by  his  own  consent  or 
his  negligence.  The  only  exception  to  this  rule  is  the  case  of  a 
bona  fide  purchaser  for  value  of  negotiable  paper.  We  have  no 
reference,  of  course,  to  the  taking  of  property  for  public  uses  by 
judicial  condemnation,  which  may  be  done  without  the  owner's 
consent. 

It  cannot  be  contended,  with  any  degree  of  plausibility,  that, 
under  the  facts  of  this  case,  the  complainant  was  guilty  of  negli- 
gence or  the  want  of  ordinary  care  in  the  custody  of  the  certifi- 
cate. He  kept  it  in  a  box  in  the  vault  of  a  banking-house,  whence 
it  was  abstracted  by  some  unknown  person,  apparently  without 
any   fault  on  his  part. 

Nor  does  any  question   arise   involving  the   rights   of  a   subse- 


EAST    BIRMINGHAM    LAND    CO.    V.    DENNIS.  TfiJ 

• 

quent  bona  fide  purchaser  of  stock  from  one  shown  to  be  the 
owner  on  the  corporate  books,  who  has  already  made  a  prior  un- 
registered transfer  of  it  to  another  purchaser.  All  such  transfers 
made  by  the  true  owner,  and  not  registered  on  the  books  of  the 
corporation  within  fifteen  days,  are  declared  by  statute  to  be 
"void  as  to  bona  fide  creditors  or  purchasers  without  notice." 
Code  1886,  §  1671,  Fisher  v.  Jones,  82  Ala.  117,  3  So.  Rep.  13. 
If  the  defendant  i\Iudd  had  claimed  by  a  subsequent  purchase 
from  Dearborn,  the  owner  of  the  stock  on  the  corporate  books, 
this  question  w^ould  arise.  But  he  does  not  so  claim,  his  title 
being  derived  through  the  complainant  Dennis,  himself,  by  two 
or  more  intermediate  transferees,  the  first  of  whom  was  a  fraud- 
ulent holder  without  title.  Whether  Aludd's  title  to  the  stock, 
therefore,  is  superior  to  that  of  Dennis,  depends  on  whether  a 
certificate  of  stock,  indorsed  in  blank  by  the  owner,  is  to  be  treated 
as  a  negotiable  paper.  The  rule  is  well  settled  that  a  bona  fide 
purchaser  of  negotiable  bill,  bond,  or  note,  although  he  buys  from 
a  thief,  acquires  a  good  title,  if  he  pays  value  for  it,  without 
notice  of  the  infirmity  of  his  vendor's  title.  The  authorities  are 
clear  in  support  of  the  view  that  a  certificate  of  corporate  shares 
of  stock,  in  the  ordinary  form,  is  not  negotiable  paper;  and  that 
a  purchaser  of  such  certificate,  although  indorsed  in  blank  by 
the  owner,  w^here  no  question  arises  under  the  registration  laws, 
obtains  no  better  title  to  the  stock  than  his  vendor  had,  in  the 
absence  of  all  negligence  on  the  part  of  the  owner,  or  his  au- 
thority to  make  the  sale.  This  question  arose  and  was  decided 
by  the  New  York  Court  of  Appeals  in  Mechanic's  Bank  v.  Rail- 
road Co.,  13  N.  Y.  599  (1856).  It  was  there  held  that  such  a 
certificate  does  not  partake  of  the  character  of  a  negotiable  instru- 
ment, and  that  a  bona  fide  assignee,  with  full  power  to  transfer 
the  stock,  takes  the  certificate  subject  to  the  equities  which  existed 
against  his  assignor.  Such  certificates,  said  Comstock,  J.,  "con- 
tain no  words  of  negotiability.  They  declare  simply  that  the  per- 
son named  is  entitled  to  certain  shares  of  stock.  They  do  not, 
like  negotiable  instruments,  run  to  the  bearer  or  order  of  the 
party  to  whom  they  are  given."  They  were  said  to  be  in  some 
respects  like  a  bill  of  lading  or  warehouse  receipt,  being  "the 
representative  of  property  existing  under  certain  conditions,  and 
the  documentary  evidence  of  title  thereto."  The  most  that  can  be 
said  is  that  all  such  instruments  possess  a  sort  of  quasi  negotia- 
bility, dependent  on  the  custom  of  merchants  and  the  convenience 
of  trade.  They  are  not,  in  the  matter  of  transferability,  protected 
strictly   as   negotiable  paper. 

In  Shaw  v.  Spencer,  100  Mass.  382,  it  was  also  decided  that  a 
certificate  of  corporate  stock,  transferred  in  blank  on  its  back, 
was  clearly  not  a  negotiable  instrument.  "No  commercial  usage," 
it  was  said,  "could  give  to  such  an  instrument  the  attribute  of 
negotiability.  However  many  intermediate  hands  it  may  pass 
through,  whoever  would  obtain  a  new  certificate  in  his  own  name 


3C8  TRANSFER    OF    SHARES. 

• 

must  fill  out  the  blanks  *  *  *  so  as  to  derive  title  to  himself 
directly  from  the  last  recorded  stockholder,  who  is  the  only  recog- 
nized and  legal  owner  of  the  shares."  The  case  of  Sewall  v. 
Water-Power  Co.,  4  Allen,  282,  decided  by  the  same  court  a  few 
years  before,  is  referred  to  as  a  precedent  in  support  of  this  con- 
clusion. 

The  precise  point  in  the  present  case  was  also  decided  in  Bar- 
stow  V.  Mining  Co.,  64  Cal.  388,  i  Pac.  Rep.  349,  where_  it 
was  expressly  held  that  a  bona  fide  purchaser  of  stock  standing 
on  the  company's  books  in  the  name  of  the  former  owner,  regu- 
larly indorsed  by  him,  and  stolen  from  the  present  owner  without 
his  fault,  gets  no  title.  The  decision  was  based  on  the  fact  that 
such  certificates  are  not  negotiable  instruments,  but  simply  muni- 
ments of  title,  and  evidences  of  the  holder's  right  to  a  given  share 
in  the  property  and  franchises  of  the  corporation.  It  was  ob- 
served, in  regard  to  the  matter  of  negligence,  as  follows :  "But 
if  the  purchaser  from  one  who  has  not  the  title,  and  has  no  au- 
thority to  sell,  relies  for  his  protection  on  the  negligence  of  the 
true  owner,  he  must  show  that  such  negligence  was  the  prox- 
imate cause  of  the  deceit." 

The  same  principle  was  applied  to  bills  of  lading  in  Gurney  v. 
Behrend,  3  El.  &  Bl.  622,  decided  by  the  English  Queen's  Bench, 
where  an  instrument  of  that  kind,  indorsed  in  blank  by  the  con- 
signor, and  sent  by  him  to  his  correspondent,  had  been  misappro- 
priated. The  correspondent,  without  authority,  fraudulently  trans- 
ferred the  bill  for  value,  and  it  was  held  by  Lord  Campbell  that, 
for  the  want  of  the  element  of  negotiability  in  the  paper,  the 
title  to  the  goods  was  unafifected  by  the  transaction. 

The  doctrine  of  Barstow  v.  Mining  Co.,  supra,  is  well  supported 
by  authority,  and,  in  our  judgment,  announces  a  correct  principle 
of  law,  and  we  fully  approve  it.  Willey  v.  Sargent,  14  Amer. 
Dec,  note,  p.  427,  and  cases  there  cited;  Cook,  Stocks,  §§7,  10, 
192,  368,  437;  2  Daniel,  Neg.  Inst.  (3d  Ed.),  §  i7o8g.  It  har- 
monizes entirely  with  the  declaration  of  our  statute  that  shares 
of  stock  in  private  corporations  are  "personal  property,  transfer- 
able on  the  books  of  the  corporation"  in  accordance  with  the  rules 
and  regulations  of  the  corporation.  Code  1886,  §  1669;  Camp- 
bell V.  Woodstock  Iron  Co.,  83  Ala.  451,  3  So.  Rep.  369. 

There  is  a  class  of  cases,  not  to  be  confounded  with  the  one  in 
hand,  where  the  holder  of  such  a  certificate  of  stock,  indorsed  in 
blank,  is  clothed  with  power  as  agent  or  trustees  to  deal  with 
such  stock  to  a  limited  extent,  and  transfers  it  by  exceeding  his 
powers,  or  in  breach  of  his  trust.  In  such  cases  it  has  often  been 
held  that  the  true  owner,  having  conferred  on  the  holder  by  con- 
tract all  the  external  indicia  of  title,  and  an  apparently  unlimited 
power  of  disposition  over  the  stock,  "is  estopped  to  assert  his 
title  as  against  a  third  person,  who,  acting  in  good  faith,  acquires 
it  for  value  from  the  apparent  owner."  2  Daniel,  Neg.  Inst.  (3d 
ed.),  §   I708g;  McNeil  v.  Bank,  46  N.  Y.  325;  Turnpike  Co.  v. 


MCNEIL   V.    TENTH    NATIONAL    BANK.  3O9 

Ferree,  17  N.  J.  Eq.  117;  Prall  v.  Tilt,  28  N.  J.  Eq.  479;  Bank  v. 
Livingston,  74  N.  Y.  223.  These  cases  rest  on  the  principle  that 
it  is  more  just  and  reasonable,  where  one  of  two  innocent  parties 
must  sufifer  loss,  that  he  should  be  the  loser  who  has  put  trust 
and  confidence  in  the  deceiver  than  a  stranger  who  has  been  neg- 
ligent in  trusting  no  one.     Allen  v.  Maury,  66  Ala.   10. 

It  being  an  established  principle  of  law  that  certificates  of  stock 
are  not  to  be  regarded  as  negotiable  paper,  it  is  not  permissible 
to  prove  a  custom  or  usage  among  stock-brokers  to  the  contrary. 
No  usage  is  good  which  conflicts  with  an  established  principle  of 
law,  any  more  than  one  which  contravenes  or  nullifies  the  express 
stipulations  of  a  contract.  Dickinson  v.  Gay,  83  Am.  Dec.  656, 
note  664;  Railroad  Co.  v.  Johnson,  75  Ala.  576;  Lehman  v.  Mar- 
shall, 47  Ala.  362. 

The  decree  of  the  court  below  is  in  accordance  with  these 
views,  and  must  be  affirmed. 


McNEIL  V.  TENTH   NATIONAL   BANK. 

1871.     46  N.  Y.  325,  7  Am.  Rep.  341. 
Fraudulent  Transfer  by  Pledgee — Estoppel. 

RAPALLO,  J.:  The  pledge  of  the  plaintiff's  shares  by  his 
brokers,  for  a  larger  sum  than  the  amount  of  their  lien  thereon, 
was  a  clear  violation  of  their  duty,  and  excess  of  their  actual 
power.  And  if  the  eft'ect  of  the  transaction  was  merely  to  trans- 
fer to  the  appellant,  through  Fred.  Butterfield,  Jacobs  &  Co.,  the 
title  or  interest  of  Goodyear  Brothers  and  Durant  in  the  shares, 
the  judgment  appealed  from  was  right. 

It  must  be  conceded  that,  as  a  general  rule,  applicable  to  prop- 
erty other  than  negotiable  securities,  the  vendor  or  pledgor  can 
convey  no  greater  right  or  title  than  he  has.  But  this  is  a  truism 
predicable  of  a  simple  transfer  from  one  party  to  another  where 
no  other  element  intervenes.  It  does  not  interfere  with  the  well- 
established  principle,  that  where  the  true  owner  holds  out  another, 
or  allows  him  to  appear,  as  the  owner  of,  or  as  having  full  power 
of  disposition  over  the  property,  and  innocent  third  parties  are 
thus  led  into  dealing  with  such  apparent  owner,  they  will  be  pro- 
tected. Their  rights  in  such  cases  do  not  depend  upon  the  actual 
title  or  authority  of  the  party  with  whom  they  deal  directly,  but 
are  derived  from  the  act  of  the  real  owner,  which  precludes  him 
from  disputing,  as  against  them,  the  existence  of  the  title  or 
power  which  through  negligence  or  mistaken  confidence  he  caused 
or  allowed  to  appear  to  be  vested  in  the  party  making  the  con- 
veyance. Pickering  v.  Busk,  15  East,  38;  Gregg  v.  Wells,  10 
Adol.  &  El.  90;  Saltus  v.  Everett,  20  Wend.  268.  284;  Mowrey 
V.  Walsh,  8  Cow.  238;  Root  v.  French,  13  Wend.  570. 

The  true  point  of  inquiry  in  this  case  is,  whether  the  plaintiff 
did  confer  upon  his  brokers  such  an  apparent  title  to,  or  power 


3IO 


TRANSFER    OF    SHARES. 


of  disposition  over  the  shares  in  question,  as  will  thus  estop  him 
from  asserting  his  own  title,  as  against  parties  who  took  bona  fide 
through  the  brokers. 

Simply  intrusting  the  possession  of  a  chattel  to  another  as  de- 
positary, pledgee  or  other  bailee,  or  even  under  a  conditional  ex- 
ecutory contract  of  sale,  is  clearly  insufficient  to  preclude  the  real 
owner  from  reclaiming  his  property,  in  case  of  an  unauthorized 
disposition  of  it  by  the  person  so  intrusted.  Ballard  v.  Burgett, 
40  N.  Y.  R.  314.  ''The  mere  possession  of  chattels,  by  whatever 
means  acquired,  if  there  be  no  other  evidence  of  property  or 
authority  to  sell  from  the  true  owner,  will  not  enable  the  pos- 
sessor to  give  a  good  title."  Per  Denio,  J.,  in  Covill  v.  Hill,  4 
Denio,  323. 

But  if  the  owner  intrusts  to  another,  not  merely  the  possession 
of  the  property,  but  also  written  evidence,  over  his  own  signature, 
of  title  thereto,  and  of  an  unconditional  power  of  disposition  over 
it,  the  case  is  vastly  different.  There  can  be  no  occasion  for 
the  delivery  of  such  documents,  unless  it  is  intended  that  they 
shall  be  used,  either  at  the  pleasure  of  the  depositary,  or  under 
contingencies  to  arise.  If  the  conditions  upon  which  this  appar- 
ent right  of  control  is  to  be  exercised  are  not  expressed  on  the 
face  of  the  instrument,  but  remain  in  confidence  between  the 
owner  and  the  depositary,  the  case  cannot  be  distinguished  in 
principle,  from  that  of  an  agent  who  receives  secret  instructions 
qualifying  or  restricting  an  apparently  absolute  power. 

In  the  present  case,  the  plaintiff  delivered  to  and  left  with  his 
brokers  the  certificate  of  the  shares,  having  indorsed  thereon  the 
form  of  an  assignment,  expressed  to  be  made  "for  value  re- 
ceived," and  an  irrevocable  power  to  make  all  necessary  transfers. 
The  name  of  the  transferee  and  attorney,  and  the  date  were  left 
blank.  This  document  was  signed  by  the  plaintiff,  and  its  effect 
must  be  now  considered. 

It  is  said  in  some  English  cases,  that  blank  assignments  of 
shares  in  corporations  are  irregular  and  invalid;  but  that  opinion 
is  expressed  in  cases  where  the  shares  could  only  be  transferred 
by  deed  under  seal,  duly  attested,  and  is  placed  upon  the  ground 
that  a  deed  cannot  be  executed  in  blank. 

Without  referring  to  the  American  doctrine  on  that  subject,  it 
is  sufficient  to  say  that  no  such  formality  was  requisite  in  this 
case.  It  was  only  necessary  to  a  valid  transfer  as  between  the 
parties,  that  the  assignment  and  power  should  be  in  writing. 
The  common  practice  of  passing  the  title  to  stock  by  delivery  of 
the  certificate  with  blank  assignment  and  power  has  been  repeat- 
edly shown  and  sanctioned  in  cases  which  have  come  before  our 
courts.  Such  was  established  to  be  the  common  practice  in  the 
city  of  New  York,  in  the  case  of  The  New  York  and  New  Haven 
Railroad  Company  v.  Schuyler,  43  N.  Y.  41,  and  the  rights  of 
parties  claiming  under  such  instruments  were  fully  recognized 
in  that  case.     And  in  the  case  of  Kortright  v.  The  Commercial 


MCNEIL    V.    TENTH    NATIONAL    BANK.  3II 

Bank  of  Buffalo,  20  Wend.  91,  and  22  Wend.  348,  the  same 
usage  was  established  as  existing  in  New  York  and  other  States, 
and  it  was  expressly  held  that  even  in  the  absence  of  such  usage 
a  blank  transfer  on  the  back  of  the  certificate,  to  which  the  holder 
has  affixed  his  name,  is  a  good  assignment;  and  that  a  party  to 
whom  it  is  delivered  is  authorized  to  fill  it  up,  by  writing  a 
transfer  and  power  of  attorney  over  the  signature. 

It  has  also  been  settled,  by  repeated  adjudications,  that,  as  be- 
tween the  parties,  the  delivery  of  the  certificate,  with  assignment 
and  power  indorsed,  passes  the  entire  title,  legal  and  equitable, 
in  the  shares,  notwithstanding  that,  by  the  terms  of  the  charter  or 
by-laws  of  the  corporation,  the  stock  is  declared  to  be  transferable 
only  on  its  books ;  that  such  provisions  are  intended  solely  for 
the  protection  of  the  corporation,  and  can  be  waived  or  asserted 
at  its  pleasure,  and  that  no  effect  is  given  to  them  except  for  the 
protection  of  the  corporation ;  that  they  do  not  incapacitate  the 
shareholder  from  parting  with  his  interest,  and  that  his  assign- 
ment, not  on  the  books,  passes  the  entire  legal  title  to  the  stock, 
subject  only  to  such  liens  or  claims  as  the  corporation  may  have 
upon  it,  and  excepting  the  right  of  voting  at  elections,  etc.  An- 
gell  and  Ames  on  Corporations  (8th  ed.),  §  354;  Bank  of  Utica  v. 
Smalley,  2  Cow.  770;  Gilbert  v.  Manchester  Co.,  11  Wend.  627; 
Kortright  v.  Commercial  Bank  of  Buffalo,  22  Wend.  362;  N.  Y. 
and  N.  H.  R.  R.  Co.  v.  Schuyler,  34  N.  Y.  80. 

In  the  case  of  Kortright  v.  Com.  Bank,  Chancellor  Walworth, 
in  a  dissenting  opinion,  strenuously  maintained,  in  conformity 
with  his  previous  decision  in  Stebbins  v.  Phoenix  Ins.  Co.,  3 
Paige,  356,  that  by  a  transfer  not  on  the  books,  the  transferee  ac- 
quired only  an  equitable  right  to  or  lien  on  the  shares ;  and  that, 
having  but  an  equitable  right  or  lien,  he  took  subject  to  all  prior 
equities  which  existed  in  favor  of  any  other  person  from  whom 
such  assignment  was  obtained.  22  Wend.  352,  353,  355.  But  his 
view  was  overruled  by  the  majority  of  the  court.  The  action  was 
at  law  in  assumpsit,  brought  by  the  holder  of  the  certificate  and 
power,  for  a  refusal  to  permit  him  to  make  a  transfer  on  the 
books,  and  the  question  of  his  legal  title  was  necessarily  involved 
in  the  case.  The  judgment  therein  must  therefore  be  regarded 
as  a  direct  adjudication  that,  as  between  the  parties,  the  legal  title 
to  the  shares  will  pass  by  delivery  of  the  certificate  and  power. 
See  20  Wend.   362, 

This  was  reasserted  in  this  court  in  the  New  Haven  Railroad 
Case,  34  N.  Y.  80,  notwithstanding  what  was  said  in  the  Me- 
chanics' Bank  Case,  13  id.  625. 

"By  omitting  to  register  his  transfer,  the  holder  of  the  certifi- 
cate and  power  fails  to  obtain  the  right  to  vote,  and  may  lose 
his  stock  by  a  fraudulent  transfer  on  the  books  of  the  company, 
by  the  registered  holder,  to  a  bona  fide  purchaser  (34  N.  Y.  80)  ; 
but  in  this  respect  he  is  in  a  condition  analogous  to  that  of  the 
holder  of  an  unrecorded  deed  of  land,  and  possesses  a  no  less  per- 


312 


TRANSFER    OF    SHARES. 


feet  title  as  against  the  assignor  and  others.  And  he  would  have 
an  action  against  the  corporation,  for  allowing  such  a  transfer  in 
violation  of  his  rights.  (Id.)  He  also  takes  the  risk  of  the  col- 
lection of  dividends  by  his  assignor,  or  of  any  lien  the  corporation 
may  have  on  the  shares.  But  in  other  respects  his  title  is 
complete. 

The  holder  of  such  a  certificate '  and  power  possesses  all  the 
external  indicia  of  title  to  the  stock,  and  an  apparently  unlimited 
power  of  disposition  over  it.  He  does  not  appear  to  have,  as  is 
said  in  some  of  the  authorities  cited,  concerning  the  assignee  of 
a  chose  in  action,  a  mere  equitable  interest,  which  is  said^  to  be 
notice  to  all  persons  dealing  with  him  that  they  take  subject  to 
all  equities,  latent  or  otherwise,  of  third  parties;  but,  apparently, 
the  legal  title,  and  the  means  of  transferring  such  title  in  the  most 
effectual  manner. 

Such,  then,  being  the  nature  and  effect  of  the  documents  with 
which  the  plaintiff  intrusted  his  brokers,  what  position  does  he 
occupy  toward  persons  who,  in  reliance  upon  those  documents, 
have  in  good  faith  advanced  money  to  the  brokers  or  their  as- 
signs on  a  pledge  of  the  shares?  When  he  asserts  his  title,  and 
claims,  as  against  them,  that  he  could  not  be  deprived  of  his 
property  without  his  consent,  cannot  he  be  truly  answered  that, 
by  leaving  the  certificate  in  the  hands  of  his  brokers,  accompanied 
by  an  instrument  bearing  his  own  signature,  which  purported  to 
be  executed  for  a  consideration  and  to  convey  the  title  away  from 
him,  and  to  empower  the  bearer  of  it  irrevocably  to  dispose  of 
the  stock,  he  in  fact  "substituted  his  trust  in  the  honesty  of  his 
brokers,  for  the  control  which  the  law  gave  him  over  his  own 
property,"  and  that  the  consequences  of  a  betrayal  of  that  trust 
should  fall  upon  him  who  reposed  it,  rather  than  upon  innocent 
strangers,  from  whom  the  brokers  were  thereby  enabled  to  obtain 
their  money? 

These  principles,  in  substance,  were  applied  in  the  case  of  Kort- 
right  V.  The  Commercial  Bank.  But  it  Is  sought  to  distinguish 
that  case  from  this ;  and  it  is  argued,  that  there  the  certificate  was 
intrusted  to  an  agent,  with  authority  from  his  principal  to  borrow 
money  upon  it  for  the  benefit  of  his  principal,  and  that  he  simply 
exceeded  his  authority  by  borrowing  more  than  he  was  author- 
ized to  borrow,  and  absconding  with  the  excess. 

The  facts  were,  that  the  certificate  indorsed  by  Barker,  the 
owner  of  the  shares,  was  sent  by  him,  together  with  his  note_  for 
$10,000,  to  Bartow,  the  cashier  of  a  bank  in  Albany,  to  obtain  a 
loan  of  $10,000.  Bartow,  through  an  agent  in  New  York,  nego- 
tiated a  loan  there,  upon  the  certificate  for  $25,000,  and  absconded. 
Barker  admitted  having  received  the  $10,000. 

Whether  the  $10,000  were  to  be,  or  were,  borrowed  by  Bartow 
for  Barker,  or  advanced  by  Bartow  or  his  bank,  does  not  clearly 
appear;  and  the  opinions  delivered  in  the  case  differ  upon  the 
point  whether  Bartow  received  the  certificate  as  agent  or  pledgee. 


MCNEIL   V.    TENTH    NATIONAL   DANK.  3I3 

But,  assuming  that  he  received  it  as  agent,  the  ground  which  lies 
at  the  foundation  of  the  decision  is,  that  the  possession  of  the 
certificate  and  blank  power  gave  him  an  apparent  right  of  con- 
trol over  the  stock;  that,  if  the  holder  of  the  certificate  and  power 
was  exhibited  to  the  money  dealing  public  as  having  the  compe- 
tent right  of  pledge,  disposal  and  transfer  vested  in  him,  by 
means  of  all  the  usual  and  well-known  evidences  of  such  ris^ht, 
the  private  understanding  of  Barker  and  Bartow  could  not  aflfect 
the  rights  of  those  who,  if  misled,  were  misled  by  Barker's  own 
acts. 

It  is  true  that  Senator  Verplanck,  in  his  prevailing  opinion, 
cites  authorities  on  the  subject  of  a  deviation  by  an  agent  from 
secret  instructions,  and  treats  the  case  as  belonging  to  that  class ; 
but  he  also  rests  upon  the  more  general  principles  above  stated, 
and  cites  the  well-known  case  of  Pickering  v.  Busk,  15  East, 
38,  where  the  owner  had  allowed  a  broker  to  be  invested  with 
the  indicia  of  a  legal  title  to  goods,  by  a  transfer  of  them  into 
his  own  name  on  the  wharfinger's  books. 

The  principles  of  agency  are,  however,  applicable  to  this  case. 
In  disposing  of  a  pledge,  the  pledgee  acts  under  a  power  from  the 
pledgor.  The  distinction  between  a  lien  and  a  pledge  is  said  to 
be,  that  a  mere  lien  cannot  be  enforced  by  sale  by  the  act  of  the 
party,  but  that  a  pledge  is  a  lien  with  a  power  of  sale  super- 
added. Story  on  Bailments  (7th  ed.),  §  311,  note  2;  Wasson  v. 
Smith,  2  B.  &  Aid.  439.  The  pledgee  in  selling,  is  bound  to 
protect  the  interests  of  the  pledgor,  and,  as  to  the  surplus,  repre- 
sents the  pledgor  exclusively.  Now,  for  what  purpose  was  the 
apparent  ownership  and  power  of  disposition  of  this  stock  vested 
in  the  brokers?  Surely  for  the  purpose  of  enabling  them,  eflFect- 
ually  and  summarily,  to  execute  this  power  under  certain  condi- 
tions. If  the  power  was  absolute  on  its  face,  or  if  the  whole  legal 
title  was  by  the  instrument  apparently  vested  in  the  pledgee,  and 
the  condition  was  secret,  wherein  does  the  case  dififer  in  principle 
from  one  of  ordinary  agency? 

I  am  at  loss  to  conceive  on  what  principle  it  can  be  claimed, 
that  an  apparent  naked  authority  is  more  efifectual  to  bind  the 
party  giving  it,  than  an  apparent  ownership  as  well  as  authority. 

In  the  case  of  Jarvis  v.  Rogers,  13  Mass.  105,  the  shares  were 
transferable  by  indorsement  of  the  certificates.  The  shareholder 
indorsed  his  certificates  and  pledged  them  for  a  debt.  The  debt- 
or's friend,  by  his  authority,  and  with  his  funds,  paid  the  debt 
and  took  up  the  certificates,  and  the  debtor  allowed  them  to  re- 
main thus  indorsed,  in  his  hands,  but  not  for  any  specific  pur- 
pose. This  friend  afterward  pledged  them  for  his  own  debt,  to 
a  party  who  advanced  thereon  in  good  faith.  It  Avas  decided  that 
the  latter  could  hold  them  against  the  true  owner. 

The  court,  after  distinguishing  the  case  from  one  of  mere  bail- 
ment, says  that  after  the  plaintiff  had  put  his  name  on  the  back 
of  the  certificates,  and  allowed  them  to  go  into  the  market  with 


314 


TRANSFER    OF    SHARES. 


that  transferable  quality  about  them,  it  did  not  lie  in  the  mouth 
of  him  who  offered  them  to  the  world  in  that  shape,  to  deny  the 
effect  of  his  own  words  and  actions. 

This  decision  was  adhered  to,  and  repeated  in  Jarvis  v.  Rogers, 
15  Mass.  389,  and  recognizes  substantially  the  same  doctrine  as 
Kortright  v.  The  Com'l  Bank,  omitting  the  element  of  excess  by 
an  agent,  of  authority  actually  given,  which  is  supposed  to  have 
governed  that  case. 

Fatman  v.  Loback,  i  Duer,  354,  is  a  case_  precisely  in  point, 
and  I  see  no  ground  upon  which  the  conclusions  of  the  learned 
court  in  that  case  can  be  successfully  assailed.  The  case  of  Mc- 
Cready  v.  Ramsey,  6  Duer,  574,  which  is  cited  as  overruling 
Fatman  v.  Loback,  has  no  such  effect.  The  question  in  6  Duer 
"was  between  the  assignee  of  the  shares  and  the  corporation,  and 
it  was  held  that  the  lien  of  the  corporation  on  the  stock  for  un- 
paid subscription,  was  protected  where  the  transfer  was  not  made 
on  the  books,  a  position  fully  recognized  in  this  opinion,  and  in 
the  cases  I  have  cited.  Moreover,  in  the  case  in  6  Duer,  the 
general  act  under  which  the  corporation  was  formed,  provided 
that  transferees  of  shares  should  take  subject  to  the  liabilities  of 
prior  shareholders. 

In  the  case  of  Ex  parte  Swan,  7  C.  B.  N.  S.  400;  Swan  v. 
The  North  British  Australasian  Co.,  7  Hurl.  &  Nor.  603,  and 
Same  v.  Same,  2  Hurl.  &  Coltman,  175,  some  of  these  questions 
received  a  most  elaborate  discussion,  and  there  was  a  strong  ar- 
ray of  judicial  opinions  sustaining  the  validity  of  transfers  of 
stock,  unauthorized  in  point  of  fact  on  the  ground  that  by  mere 
negligence,  and  unintentionally,  the  true  owner  had  enabled  an- 
other to  deliver  an  apparently  valid  title  to  the  stock,  and  thus 
deceive  third  parties. 

In  that  case,  the  plaintiff  had  intrusted  to  a  broker  ten  deeds 
of  transfer,  executed  in  blank,  for  the  purpose  of  transferring 
certain  shares.  The  broker  used  only  eight  of  them  for  the  pur- 
pose intended,  and  feloniously  filled  up  and  used  the  others  as 
transfers  of  other  shares,  belonging  to  the  same  party,  forged  the 
name  of  a  subscribing  witness,  and  stole  the  certificates  of  the 
shares  from  the  plaintiff's  box,  of  which  the  plaintiff  kept  the 
key.  He  then  sold  the  shares  to  bona  fide  purchasers.  He  was 
convicted  of  the  larceny. 

In  a  contest  by  the  owner  to  get  back  the  shares,  the  Com- 
mon Bench  was,  after  two  arguments,  equally  divided  upon  the 
question  whether  the  owner  was  not  estopped  from  reclaiming 
the  shares,  by  reason  of  his  negligence  in  intrusting  the  blank 
transfers  to  the  broker,  though  they  were  intended  for  other 
shares.  The  case  was  taken  to  the  Court  of  Exchequer,  and  that 
court  was  equally  divided  upon  the  same  question.  It  was  then 
taken  to  the  Exchequer  Chamber,  where  it  was  finally  disposed 
of,  principally  on  the  ground,  that  to  estop  the  owner,  his  neg- 
ligence must  be  the  proximate  cause  of  the  deceit.     That  here  it 


MCNEIL   V.    TENTH    NATIONAL    BANK.  31$ 

was  too  remote,  as  the  blank  deeds  of  transfer  were  intended  for 
other  shares,  and  the  broker  had  to  commit  forgery  to  make 
them  available,  and  a  separate  felony  to  obtain  possession  of  the 
certificates. 

In  the  case  at  bar  none  of  these  difficulties  exist.  The  assign- 
ment and  power  were  intended  for  these  identical  shares ;  they,  as 
well  as  the  certificate,  were  voluntarily  intrusted  by  the  plaintiff 
to  the  brokers,  and  the  latter  were  thus  invested  with  the  apparent 
ownership  and  right  of  disposal,  not  merely  by  the  negligence  of 
the  true  owner,  but  by  his  voluntary  act,  and  for  the  very  pur- 
pose of  attesting  to  the  world  their  title  and  power,  in  case  the 
contingency  should  arise,  in  which,  according  to  the  understand- 
ing between  them  and  the  plaintiff,  they  would  be  justified  in 
resorting  to  the  stock  for  their  own  indemnity. 

Two  cases  have  been  cited  on  the  part  of  the  respondent  which 
require  notice,  viz.:  Covell  v.  The  Tradesmen's  Bank,  i  Paige, 
131,  and  Bush,  Administrator,  v.  Lathrop,  22  N.  Y.  535. 

In  Covell  V.  The  Tradesmen's  Bank,  the  complainant,  being  the 
owner  of  a  sealed  note  for  $2,425,  payable  to  himself,  indorsed  it 
and  pledged  it  to  M.  for  a  loan  of  $1,000.  M.  indorsed  it  and 
pledged  it  to  the  bank,  defendant,  as  security  for  an  antecedent 
debt  of  $1,000  and  a  fresh  advance  of  $1,425.  The  complainant's 
debt  to  M.  having  been  paid,  he  filed  his  bill  against  the  bank  and 
M.  to  obtain  a  surrender  of  the  note. 

The  chancellor  disposed  of  the  case  on  the  ground  that  the 
sealed  note,  being  a  mere  chose  in  action,  was  not  assignable  in 
law.  That  the  assignee  of  a  chose  in  action,  which  must  be  sued 
in  the  name  of  the  assignor,  obtains  only  an  equitable  interest, 
the  legal  title  remaining  in  the  assignor;  and  that  the  interest  of 
such  assignee,  being  only  equitable,  was  not  protected  against  the 
prior  equity  and  legal  right  of  the  original  owner.  Thus  apply- 
ing to  the  assignee  of  a  chose  in  action  the  doctrine  which  he 
afterward,  in  the  case  of  Kortright  v.  The  Commercial  Bank, 
unsuccessfully  sought  to  apply  to  the  transferee,  by  assignment 
and  power,  of  shares  of  stock  in  a  corporation. 

He  refers  to  the  decision  of  Chancellor  Kent,  in  Murray  v. 
Lylburn,  2  Johns.  Ch.,  443,  to  the  effect  that  the  assignee  of  a 
chose  in  action  takes  subject  only  to  the  equities  of  the  debtor, 
and  not  subject  to  latent  equities  of  a  third  person  against  the 
assignor,  and  points  out  that  the  case  of  Redfern  v.  Ferrier,  i 
Dow's  Par.  R.  50.  cited  by  Chancellor  Kent,  was  decided,  not 
on  the  ground  that  the  assignee  of  a  chose  in  action  was  pro- 
tected against  a  latent  equity  in  a  third  person,  but  that  a  share 
in  a  joint-stock  company  was  not  a  chose  in  action;  that  the  a.s- 
signee  had,  according  to  the  law  of  Scotland,  the  legal  title  to 
the  shares,  and  that  the  equities _  of  the  parties  being  equal,  the 
court  would  not  divest  him  of  his  legal  right. 

In  Bush,  ^Administrator,  v.  Lathrop,  22  N.  Y.  535,  the  plain- 
tiff's  intestate,   being  the  assignee  of  a  bond   and   mortgage    for 


3l6  TRANSFER    OF    SHARES. 

$1,400,  pledged  them  to  Preston  to  secure  $268.20,  and  delivered 
them  to  the  pledgee  with  a  note  for  the  amount,  and  an  assign- 
ment of  the  bond  and  mortgage,  absolute  on  its  face,  but  express- 
ing a  consideration  of  only  $268.20,  the  mortgage  being  good  for 
its  full  amount.  Preston  gave  back  a  receipt,  agreeing  to  redeem 
the  bond  and  mortgage  on  payment  of  the  note. 

Preston  afterward  assigned  the  bond  and  mortgage  to  Smith 
&  Norton,  who  in  turn  assigned  to  the  defendant  for  $1,488,  ad- 
vanced by  him  in  good  faith.  The  plaintiff  brought  his  action, 
to  obtain  a  retransfer  of  the  bond  and  mortgage  on  payment  of 
the  $268.20,  with  interest. 

Denio,  J.,  in  delivering  the  opinion  of  the  court,  reviews  the 
decision  of  Chancellor  Kent,  in  Murray  v.  Lylburn,  and  other 
cases,  on  the  subject  of  latent  equities,  disapproving  of  the  doc- 
trine of  Chancellor  Kent,  and  coming  to  the  conclusion,  that  an 
assignment  of  a  chose  in  action  takes  but  an  equitable  interest, 
notwithstanding  the  provisions  of  the  Code  which  authorize  him 
to  sue  in  his  own  name.  That  all  the  assignees  of  the  bond  and 
mortgage  in  question,  subsequent  to  the  original  obligee,  must  be 
regarded  as  holding  merely  equitable  interests,  and  that,  as  be- 
tween parties  so  circumstanced,  priority  of  time  confers  a  prefer- 
able right,  22  N.  Y.  R.  547,  548,  following,  substantially,  the 
opinion  of  Chancellor  Walworth  in  Covell  v.  The  Tradesmen's 
Bank,  which  he  cites. 

He  concedes  that  this  doctrine  forms  a  serious  impediment  to 
his  negotiation  of  choses  in  action,  and  alludes  to  the  difference 
of  opinion  which  may  exist  as  to  the  policy  of  encouraging  their 
negotiation,  and  to  the  period  when  it  was  thought  so  impolitic, 
that  courts  of  law  would  not  recognize  the  rights  of  assignees. 
But  in  no  part  of  his  learned  and  exhaustive  opinion  does  he 
seek  to  apply  its  doctrine  to  shares  in  corporations,  or  other  per- 
sonal property,  the  legal  title  to  which  is  capable  of  being  trans- 
ferred by  assignment,  and  the  free  transmission  of  which,  from 
hand  to  hand,  is  essential  to  the  prosperity  of  a  commercial 
people. 

The  question  of  estoppel  does  not  seem  to  have  been  consid- 
ered in  that  case;  and  perhaps  it  would  have  been  inappropriate, 
inasmuch  as  the  assignment  upon  which  the  estoppel  could  have 
been  predicated,  if  at  all,  expressed  a  consideration  of  only 
$268.20  for  a  good  mortgage  of  $1,400;  a  circumstance  calculated 
to  excite  inquiry.  But  it  is  sufficient  for  all  present  purposes  to 
say,  that  the  reasoning  upon  which  the  decision  in  that  case  is 
founded,  is  totally  inapplicable  to  this. 

I  have  reviewed  the  authorities  at  much  more  length  than  usual, 
by  reason  of  the  difference  of  opinion  expressed  in  the  late  Court 
of  Appeals  in  this  case,  and  for  the  purpose  of  meeting  the  posi- 
tions, so  ably  maintained  in  the  opinions,  in  favor  of  the  re- 
spondent, delivered  in  the  court  below,  and  in  the  late  court,  on 
the  former  hearing. 


MCNEIL  V.   TENTH    NATIONAL   BANK.  317 

% 

My  conclusion  is  that  the  Tenth  National  Bank  must,  on  the 
facts'  found,  be  deemed  to  have  advanced  bona  fide  on-  the  credit 
of  the  shares,  and  of  the  assignment  and  power  executed  by  the 
plaintiff,  and  is  entitled  to  hold  the  stock  for  the  full  amount  so 
advanced  and  remaining  unpaid,  after  exhausting  the  other  securi- 
ties received  for  the  same  advance. 

The  points  relative  to  the  stamp  and  subscribing  witness  were 
fully  answered  in  the  opinions  delivered  on  the  first  argument, 
and  do  not  appear  to  have  been  the  subject  of  dissent.  I  do  not 
deem  it  necessary  again  to  discuss  them  here. 

The  judgment  of  the  General  Term,  and  that  entered  on  the 
report  of  the  referee,  should  be  modified,  so  as  to  allow  the  plain- 
tiff to  redeem,  on  payment  of  the  balance  due  to  the  Tenth  Na- 
tional Bank,  on  its  a'dvance  of  June  19,  1868,  and  the  costs  of 
the   action. 

All  concur  except  Allen  and  Folger,  JJ.,  not  voting. 

Judgment  modified.^ 

*See,  also,  Knox  v.  Eden  Musee  Co.,  148  N.  Y.  441,  42  N.  E.  988,  31 
L  R  A  779  51  Am.  St.  700;  First  Nat.  Bank  v.  Nat.  Broadway  Bank, 
156  N.  Y.  459,  51  N.  E.  398,  42  L.  R.  A.  139  (unlawful  pledge  of  stock 
certificate  by 'trustee);  Shattuck  v.  American  Cement  Co.,  205  Pa.  St. 
197  54  Atl.  785,  97  Am.  St.  735;  Dollar  Savings  Fund  &  Trust  Co.  v. 
Pittsburg  Plate  Glass  Co.,  213  Pa.  St.  307,  62  Atl.  916  (forgery  of  signa- 
ture of  transfer  agent);  Farmers'  Bk.  v.  Diebold  Safe  &  Lock  Co.,  66 
Ohio  St.  367,  64  N.  E.  518;  and  the  new  Uniform  Sales  Act.— Ed. 


CHAPTER  XIV. 

CORPORATE    MEETINGS    AND    ELECTIONS. 

NORTH-WEST  TRANSPORTATION   CO.,  LIM.,   v. 

BEATTY. 

1887.     L.  R.   12  Appeal  Cas.   589. 

SIR  RICHARD  BAGGALLAY:  The  action  in  which  this  ap- 
peal has  been  brought  was  commenced  on  the  31st  of  May,  1883, 
in  the  Chancery  Division  of  the  High  Court  of  Justice  of  On- 
tario. The  plaintiff,  Henry  Beatty,  is  a  shareholder  in  the  North- 
West  Transportation  Company,  Limited,  and  he  sues  on  behalf 
of  himself  and  all  other  shareholders  in  the  company,  except 
those  who  are  defendants.  The  defendants  are  the  company  and 
five  shareholders,  who,  at  the  commencement  of  the  action,  were 
directors  of  the  company.  The  claim  in  the  action  is  to  set  aside 
a  sale  made  to  the  company  by  James  Hughes  Beatty,  one  of  the 
directors,  of  a  steamer  called  the  United  Empire,  of  which  previ- 
ously to  such  sale  he  was  sole  owner. 

The  general  principles  applicable  to  cases  of  this  kind  are  well 
established.  Unless  some  provision  to  the  contrary  is  to  be 
found  in  the  charter  or  other  instrument  by  which  the  company 
is  incorporated,  the  resolution  of  a  majority  of  the  shareholders, 
duly  convened,  upon  any  question  with  which  the  company  is 
legally  competent  to  deal,  is  binding  upon  the  minority,  and  con- 
sequently upon  the  company,  and  every  shareholder  has  a  perfect 
right  to  vote  upon  any  such  question,  although  he  may  have  a 
personal  interest  in  the  subject-matter  opposed  to,  or  different 
from,  the  general  or  particular  interests  of  the  company. 

On  the  other  hand,  a  director  of  a  company  is  precluded  from 
dealing,  on  behalf  of  the  company,  with  himself,  and  from  enter- 
ing into  engagements  in  which  he  has  a  particular  interest  con- 
flicting, or  which  possibly  may  conflict,  with  the  interests  of  those 
whom  he  is  bound  by  fiduciary  duty  to  protect,  and  this  rule  is 
as  applicable  to  the  case  of  one  of  several  directors  as  to  a  man- 
aging or  sole  director.  Any  such  dealing  or  engagement  may, 
however,  be  affirmed  or  adopted  by  the  company,  provided  such 
affirmance  or  adoption  is  not  brought  about  by  unfair  or  improper 
means,  and  is  not  illegal  or  fraudulent  or  oppressive  towards 
those  shareholders  who  oppose  it. 

The  material  facts  of  the  case  are  not  now  in  dispute. 

The  company  was  incorporated  under  the  provisions  of  the 
Canada  Joint  Stock  Companies  Letters  Patent  Act  of  1869.  By 
its  charter,   dated   the   5th   of   March,    1877.   it  was  authorized   to 

.V8 


NORTH-WEST    TRANSPORTATION    CO.,    LIM.,    V.    BEATTY.  3I9 

carry  on  business  in  the  province  of  Ontario,  and  to  construct, 
acquire,  and  maintain  steam,  sailing,  and  other  vessels  for  the 
conve3'ance  of  passengers  and  goods  over  navigable  waters  within 
or  bordering  upon  the  Dominion  of  Canada,  to  and  from  any 
foreign  ports,  with  power,  amongst  other  things,  to  sell,  charter 
or  dispose  of  any  of  such  vessels,  and  to  make  contracts  with 
any  person  or  corporation  whatever. 

By  sees.  i6,  i8,  and  22  of  the  Act  of  1869,  it  was  provided 
that  the  affairs  of  every  company  incorporated  under  its  provi- 
sions should  be  managed  by  a  board  of  directors,  the  major  part 
of  whom  should  at  all  times  be  residents  in  Canada,  and  subjects 
of  Her  Majesty,  and  that  the  directors  should  have  power  to 
make  for  the  company  any  description  of  contract  into  which  the 
company  might  by  law  enter,  and  from  time  to  time  to  make  bye- 
laws  not  contrary  to  law,  but  every  bye-law  so  made,  unless  in 
the  meantime  confirmed  at  a  general  meeting  duly  called  for  that 
purpose,  should  only  have  force  until  the  next  annual  meeting  of 
the  companv,  and,  in  default  of  confirmation  thereat,  should,  at 
and  from  that  time  only,  cease  to  have  force ;  and  the  powers 
conferred  upon  the  directors  by  section  22  were  made  subject  to  a 
proviso  that  one-fourth  part  in  value  of  the  shareholders  of  the 
company  should  at  all  times  have  the  right  to  call  a  special  meet- 
ing for  the  transaction  of  any  business  specified  in  such  written 
requisition  and  notice  as  they  might  issue  to  that  effect. 

By  bye-laws,  made  in  March,  1877,  and  duly  confirmed,  it  was 
provided  that  the  afifairs  of  the  company  should  be  managed  by 
a  board  of  five  directors ;  that  the  qualification  for  a  director 
should  be  the  holding  of  five  shares  in  the  company ;  that  every 
shareholder  should  have  as  many  votes  as  he  had  shares  in  the 
company;  that  the  annual  meetings  should  be  held  on  the  first 
Wednesday  in  February  in  each  year,  and  that  at  such  meetings 
the  directors  should  be  annually  elected,  retiring  directors  being 
eligible   for   re-election. 

The  company  commenced  business  shortly  after  its  incorpora- 
tion, and  acquired  for  its  purposes  a  fleet  of  several  steamers. 
In  the  autumn  of  1882,  one  of  its  steamers,  the  Asia,  was  lost, 
and  another,  the  Sovereign,  was  deemed  unsuitable  for  the  com- 
pany's business.  At  this  time  the  steamer  United  Empire  was  in 
process  of  building  for  the  defendant,  James  Hughes  Beatty,  and 
was  approaching  completion ;  the  contract  for  her  construction 
had  been  entered  into  in  December,  1880,  and  she  was  in  fact 
completed  on  the  20th  of  May,  1883.  a  few  days  before  the  com- 
mencement of  the  action.  The  acquisition  of  the  United  Empire 
by  the  company  had  been  suggested  to  the  directors  and  had  been 
the  subject  of  consideration  by  them  and  others  interested  in  the 
company  as  early  as  the  close  of  the  year  t88i  ;  the  loss  of  the 
Asia  led  to  the  matter  being  further  considered,  and  the  sale  to 
the  company  was  brought  about  in  the  following  manner: 

The  annual  meeting  for  the  year   1883  was  held  on  the  7th  of 


320  CORPORATE    MEETINGS   AND    ELECTIONS. 

February,  and,  at  such  meeting,  the  defendants  were  elected  di- 
rectors for  the  ensuing  year;  at  the  same  meeting  a  discussion 
took  place  as  to  the  suggested  purchase  of  the  United  Empire, 
and  it  was  resolved  that  a  special  meeting  of  the  shareholders 
should  be  held  on  .the  i6th  for  the  purpose  of  having  submitted 
to  them  a  bye-law  for  the  purchase  of  the  steamer  United  Em- 
pire, and  also  to  consider  the  advisability  of  selling  the  steamer 
Sovereign. 

At  a  meeting  of  the  directors,  held  on  the  loth  of  February, 
1883,  and  at  which  all  the  directors  except  the  defendant,  William 
Beatty,  were  present,  it  was  resolved  that  a  bye-law,  which  was 
read  to  the  meeting,  for  the  purchase  of  the  United  Empire 
should  pass.  It  is  unnecessary  to  refer  in  detail  to  the  terms 
in  which  this  bye-law  was  expressed ;  it  is  sufficient  to  state  that, 
after  reciting  an  agreement  between  the  company  and  the  de- 
fendant, James  Hughes  Beatty,  that  the  company  should  buy  and 
the  defendant  should  sell  the  steamer  United  Empire  for  the  sum 
of  $125,000,  to  be  in  part  paid  in  cash  and  in  part  secured,  as 
therein  mentioned,  it  was  enacted  that  the  company  should  pur- 
chase the  steamer  from  the  defendant  upon  those  terms,  with 
various  directions   for  giving  effect  to  the  terms  of  the  contract. 

The  agreement  recited  in  the  bye-law  was  executed  at  the  same 
meeting. 

At  a  meeting  of  shareholders,  held,  as  arranged,  on  the  i6th 
of  February,  1883,  the  bye-law  which  had  been  enacted  by  the 
directors  was  read  by  the  secretary,  and,  after  being  modified  in 
its  terms,  with  respect  to  the  price,  was  adopted  by  a  majority 
of  votes. 

The  United  Empire,  on  her  completion,  was  delivered  to  the 
company,  and  has  ever  since  been  employed  in  the  ordinary  busi- 
ness of  the  company. 

It  is  proved  by  uncontradicted  evidence,  and  is  indeed  now 
substantially  admitted,  that  at  the  date  of  the  purchase  the  acqui- 
sition of  another  steamer  to  supply  the  place  of  the  Asia  was 
essential  to  the  efficient  conduct  of  the  company's  business ;  that 
the  United  Empire  was  well  adapted  for  that  purpose;  that  it 
was  not  within  the  power  of  the  company  to  acquire  any  other 
steamer  equally  well  adapted  for  its  business ;  and  that  the  price 
agreed  to  be  paid  for  the  steamer  was  not  excessive  or  unrea- 
sonable. 

Had  there  been  no  material  facts  in  the  case  other  than  those 
above  stated,  there  would  have  been  in  the  opinion  of  their  Lord- 
ships, no  reason  for  setting  aside  the  sale  of  the  steamer;  it 
would  have  been  immaterial  to  consider  whether  the  contract  for 
the  purchase  of  the  United  Empire  should  be  regarded  as  one 
entered  into  by  tbe  directors  and  confirmed  by  the  shareholders, 
or  as  one  entirely  emanating  from  the  shareholders ;  in  either 
view  of  the  case,  tlie  transaction  was  one  which,  if  carried  out 
in  a  regular  way,  was  within  the  powers  of  the  company ;  in  the 


NORTH-WEST   TRANSPORTATION    CO.,    LIM.,    V.    BEATTY.  32I 

former  view,  any  defect  arising  from  the  fiduciary  relationship 
of  the  defendant,  James  Hughes  Beatty,  to  the  company  would 
be  remedied  by  the  resolution  of  the  shareholders,  on  the  i6th  of 
February,  and,  in  the  latter,  the  fact  of  the  defendant  being  a 
director  would  not  deprive  him  of  his  right  to  vote,  as  a  share- 
holder, in  support  of  any  resolution  which  he  might  deem  favour- 
able to  his  own  interests. 

There  is,  however,  a  further  element  of  consideration,  arising 
from  the  following  facts,  which  have  been  relied  upon  in  the 
arguments  on  behalf  of  the  plaintiff,  as  evidencing  that  the  reso- 
lution of  the  i6th  of  February  was  brought  about  by  an  unfair 
and  improper  means. 

It  appears  that  at  the  commencement  of  the  year  1833,  595  of 
the  600  shares  into  which  the  capital  of  the  company  was  divided 
were  held  by  seven  living  shareholders,  and  five  belonged  to  the 
estate  of  a  deceased  shareholder;  that  of  the  seven  living  share- 
holders— 

The  defendant,  J.  H.  Beatty,  held  200  shares. 

The  plaintiff  120  shares. 

S.  Neelon   (then  a  director)    loi  shares. 

F.  S.  Hankey  71   shares. 

The  defendant,  J.  D.  Beatty,  59  shares. 

J.  C.  Graham  39  shares. 

The  defendant,  W.  Beatty,  5  shares. 

It  further  appears  that  ihe  defendant  J.  H.  Beatty,  purchased 
the  loi  shares  of  S.  Neelon,  and  that  they  were  transferred  to 
him  on  the  last  day  of  January,  1883,  the  number  of  shares  held 
by  the  defendant  being  raised  to  301,  an  actual  majority  of  all  the 
shares  in  the  company;  that  on  the  morning  of  the  7th  of  Febru- 
ary, before  the  annual  meeting  of  that  day,  the  defendant,  J.  H. 
Beatty,  transferred  five  of  his  shares  to  the  defendant  Rose,  and 
the  like  number  to  the  defendant  Laird,  whereby  they  respec- 
tively became  qualified  to  be  elected  directors,  and  that  on  the 
same  day  they  were  elected  directors. 

The  defendants  Rose  and  Laird  deny,  and  their  denial  is  un- 
impeached,  that  there  was  any  agreement  or  understanding  be- 
tween them  or  either  of  them  and  the  defendant,  J.  H.  Beatty, 
that  they  would  support  his  views  in  respect  of  the  sale  of  his 
steamer  to  the  company;  they  both,  however,  admit  that,  pre- 
viously to  the  transfers  of  the  shares  to  them,  they  considered 
that  the  purchase  of  the  steamer  would  be  beneficial  to  the  com- 
pany, that  they  accepted  the  transfer  with  the  view  of  becoming 
directors,  and  that  the  defendant  was  well  aware  of  the  opinions 
and   views   entertained   by   them. 

By  the  transfers  to  the  defendants  Rose  and  Laird,  the  num- 
ber of  shares  held  by  the  defendant,  J.  H.  Beatty,  was  reduced 
to  291,  but  the  united  voting  power  of  the  three  last  named  de- 
fendants was  such  that  they  could  command  a  majority  at  any 
meeting  of  the  shareholders. 

21 — Private  Corp. 


322  CORPORATE    MEETINGS    AND    ELECTIONS. 

Though  there  was  a  discussion  at  the  annual  meeting  on  the 
7th  of  February,  as  to  the  expediency  of  purchasing  the  steamer, 
the  resolution  directing  a  bye-law  to  be  prepared  appears  to  have 
been  passed  without  any  division. 

At  the  meeting  of  directors  of  the  loth,  the  same  three  de- 
fendants were  in  a  position  to  carry  any  resolution  or  to  pass 
any  bye-law  upon  which  they  were  agreed. 

At  the  shareholders'  meeting  of  the  i6th  the  voting  was  as 
follows : 

For  the  confirmation  of  the  bye-laws : 

Votes 

The  defendant,  J.   H.   Beatty 291 

The  defendant,  J.  E.  Rose 5 

The   defendant,   R.   Laird 5 

The  defendant,  William  Beatty 5 

Total 306 

Against  the  confirmation: 

Votes 

John   C.   Graham 39 

F.   L.   Hankey 71 

The    plaintiff 120 

The   defendant,   John   D.    Beatty 59 

Total 289 

It  follows  that  the  majority  of  votes  in  favor  of  the  confirma- 
tion of  the  bye-law  was  due  to  the  votes  of  the  defendant,  J.  H. 
Beatty. 

These  last-mentioned  facts  were  stated  by  the  plaintiff  in  his 
claim  in  the  action,  and  he  not  only  insisted  that  the  defendant, 
J.  H.  Beatty,  was  in  such  fiduciary  relation  to  the  company  that 
it  was  not  competent  for  him,  under  any  circumstances,  to  enter 
into  the  contract  for  the  sale  of  his  steamer  to  the  company,  but 
he  made  various  charges  of  fraud  and  collusion  against  the  de- 
fendant directors,  other  than  the  defendant,  J.  D.  Beatty,  who 
was  also  secretary  of  the  company. 

These  charges  of  fraud  and  collusion  were  abandoned  at  the 
trial  of  the  action,  but  the  facts  before  referred  to  were  pressed 
upon  the  judges,  before  whom,  in  succession,  the  action  came, 
and  afforded  to  those  judges  who  were  of  opinion  that  the  sale 
would  be   set   aside   the   substantial   grounds    for   their   decisions. 

The  action  first  came  on  to  be  heard  before  the  Chancellor  of 
Ontario,  who,  on  the  6th  of  May,  1884,  ordered  the  sale  to  be 
set  aside,  with  the  usual  consequential  directions.  All  charges 
of  fraud  and  collusion  being  discarded,  the  Chancellor  treated  the 
question  as  one  of  "purely  equitable  law,"  and  held  that  the 
threefold    character    of    director,    shareholder,    and    vendor,    sus- 


NORTH-WEST   TRANSPORTATION    CO,,   LIM.,   V.    BEATTY.^  ^23 

tained  by  the  defendant,  J.  H.  Beatty,  involved  a  conflict  be- 
tween duty  and  interest,  and  that,  being  so  circu-mstanced.  he 
could  not  be  permitted,  in  the  conduct  of  the  company's  affairs, 
to  exercise  the  balance  of  power  which  he  possessed,  to  the  pos- 
sible prejudice  of  the  other  shareholders. 

The  defendants  appealed  to  the  order  of  the  Chancellor,  and, 

,  on  the  7th  day  of  April,  1885,  the  Court  of  Appeals  of  Ontario 

11    allowed  the  appeal,  and  ordered  that  the  plaintiff's  bill  should  be 

■    dismissed,    with   costs.      In   the   opinion   of   the   members    of   that 

court,  the  resolution  to  purchase  the  steamer  was  a  pure  question 

of  internal  management,  and  the  shareholders  had  a  perfect  right, 

either  to  ratify  the  act  of  the  directors,  or  to  treat  the  matter 

as  an  original  offer  to  themselves,  and  to  assent  to  and  complete 

the   purchase. 

From  the  order  of  the  Court  of  Appeals  the  plaintiff  appealed 
to  the  Supreme  Court  of  Canada,  and  on  the  9th  of  April,  1886, 
the  Supreme  Court  reversed  the  order  of  the  Court  of  Appeals, 
and  affirmed  that  of  the  Chancellor.  It  appears  to  have  been  the 
opinion  of  the  judges  of  the  Supreme  Court  that  the  case  turned 
entirely  on  the  fiduciary  character  of  the  defendant,  J.  H.  Beatty, 
as  a  director;  that,  if  the  acts  or  transactions  of  an  interested 
director  were  to  be  confirmed  by  the  shareholders,  it  should  be 
by  an  exercise  of  the  impartial,  independent,  and  intelligent  judg- 
ment of  disinterested  shareholders  and  not  by  the  votes  of  the 
interested  director,  who  ought  never  to  have  departed  from  his 
duty;  that  the  course  pursued  by  the  defendant,  J.  H.  Beatty,  was 
an  oppressive  proceeding  on  his  part,  and  that  consequently,  the 
vote  of  the  shareholders,  at  the  meeting  of  the  i6th  of  February. 
1883,  was  ineffectual  to  confirm  the  bye-law  which  had  been 
enacted  by  the  directors.  The  nature  of  the  transaction  itself 
does  not  appear  to  have  been  taken  into  consideration  by  the 
judges  in  their  decision  of  the  case. 

From  this  decision  of  the  Supreme  Court  of  Canada  the  appeal 
has  been  brought  with  which  their  Lordships  have  now  to  deal. 
The  question  involved  is  doubtless  novel  in  its  circumstances,  and 
the  decision  important  in  its  consequences ;  it  would  be  very  un- 
desirable even  to  appear  to  relax  the  rules  relating  to  dealings 
between  trustees  and  their  beneficiaries ;  on  the  other  hand,  great 
confusion  would  be  introduced  into  the  affairs  of  joint  stock 
companies  if  the  circumstances  of  shareholders,  voting  in  that 
character  at  general  meetings,  were  to  be  examined,  and  their 
votes  practically  nullified,  if  they  also  stood  in  some  fiduciary 
relation  to  the  company. 

It  is  clear  upon  the  authorities  that  the  contract  entered  into 
by  the  directors  on  the  loth  of  February  could  not  have  been 
enforced  against  the  company  at  the  instance  of  the  defendant. 
J.  H.  Beatty,  but  it  is  equally  clear  that  it  was  within  the  com- 
petency of  the  shareholders  at  the  meeting  of  the  i6th  to  adopt 
or  reject  it.     In  form  and  in  terms  they  adopted  it  by  a  majority 


324  CORPORATE    MEETINGS   AND    ELECTIONS. 

of  votes,  and  the  vote  of  the  majority  must  prevail,  unless  the 
adoption  was  brought  about  by  unfair  or  improper  means. 

The  only  unfairness  or  impropriety  which,  consistently  with  the 
admitted  and  established  facts,  could  be  suggested,  arises  out  of 
the  fact  that  the  defendant,  J.  H.  Beatty,  possessed  a  voting 
power  as  a  shareholder  which  enabled  him,  and  those  who 
thought  with  him,  to  adopt  the  bye-law,  and  thereby  either  to 
ratify  and  adopt  a  voidable  contract,  into  which  he,  as  a  director, 
and  co-directors  had  entered,  or  to  make  a  similar  contract,  which 
latter  seems  to  have  been  what  was  intended  to  be  done  by  the 
resolution  passed  on  the  7th  of  February. 

It  may  be  quite  right  that,  in  such  a  case,  the  opposing  minority 
should  be  able,  in  a  suit  like  this,  to  challenge  the  transaction,  and 
to  shew  that  it  is  an  improper  one,  and  to  be  freed  from  the 
objection  that  a  suit  with  such  an  object  can  only  be  maintained 
by  the  company  itself. 

But  the  constitution  of  the  company  enabled  the  defendant,  J. 
H.  Beatty,  to  acquire  this  voting  power;  there  was  no  limit  upon 
the  number  of  shares  which  a  shareholder  might  hold  and  for 
every  share  so  held  he  was  entitled  to  a  vote;  the  charter  itself 
recognized  the  defendant  as  a  holder  of  200  shares,  one-third  of 
the  aggregate  number;  he  had  a  perfect  right  to  acquire  further 
shares,  and  to  exercise  his  voting  power  in  such  a  manner  as  to 
secure  the  election  of  directors  whose  views  upon  policy  agreed 
with  his  own,  and  to  support  those  views  at  any  shareholders' 
meeting;  the  acquisition  of  the  United  Empire  was  a  pure  ques- 
tion of  policy,  as  to  which  it  might  be  expected  that  there  would 
be  differences  of  opinion,  and  upon  which  the  voice  of  the  ma- 
jority ought  to  prevail;  to  reject  the  votes  of  the  defendant  upon 
the  question  of  the  adoption  of  the  bye-law  would  be  to  give 
effect  to  the  views  of  the  minority,  and  to  disregard  those  of 
the   majority. 

The  judges  of  the  Supreme  Court  appear  to  have  regarded  the 
exercise  by  the  defendant,  J.  H.  Beatty,  of  his  voting  power  as 
of  so  oppressive  a  character  as  to  invalidate  the  adoption  of  the 
bye-law;  their  Lordships  are  unable  to  adopt  this  view;  in  their 
opinion  the  defendant  was  acting  withm  his  rights  in  voting  as 
he  did,  though  they  agree  with  the  Chief  Justice  in  the  views 
expressed  by  him  in  the  Court  of  Appeals,  that  the  matter  might 
have  been  conducted  in  a  manner  less  likely  to  give  rise  to  objec- 
tion. 

Their  Lordships  will  humbly  advise  Her  Majesty  to  allow  the 
appeal;  to  discharge  the  order  of  the  Supreme  Court  of  Canada; 
and  to  dismiss  the  appeal  to  that  court  with  costs;  the  respondent 
must  bear  the  costs  of  the  present  appeal. 


BJORNGAARD   V.    GOODHUE   COUNTY    BANK.  325 

BJORNGAARD    v.    GOODHUE    COUNTY    BANK.^ 
1892.     59  Minn.  483,  52  N.  W.  48. 

Right    to    Vote    at    Stockholders'    Meeting — Personal    Interest    in 

Matter    Under    Consideration. 

GILFILLAN,  C.  J.:  The  defendant  bank  is  a  banking  cor- 
poration. The  defendants,  Sheldon,  Perkins,  Featherstone, 
Brooks,  Boxrud  and  WilUam,  and  Frederick  Busch,  and  the  plain- 
tiff Hoyt,  were  at  the  times  hereinafter  mentioned,  and  now  are, 
its  directors.  The  director  defendants  were  and  are  stockholders 
owning  a  large  majority  of  the  stock.  The  plaintiffs  are  stock- 
holders. The  defendant  stockholders  owned  a  lot  and  building. 
At  a  directors'  meeting  on  July  7,  1890,  all  the  directors  being 
present,  it  was  resolved,  all  the  directors  except  Hoyt,  who  pro- 
tested, voting  in  the  affirmative,  that  the  corporation  purchase  at 
a  price  specified,  said  lot  and  building,  and  on  July  11,  the  owners 
executed  a  conveyance  to  the  bank.  The  action  is  brought  to  set 
aside  the  transaction,  and  to  prevent  the  funds  of  the  bank  being 
used  to  complete  the  purchase,  and  also  to  prevent  a  ratification 
by  the  stockholders,  a  meeting  of  whom  had  been  called  for  the 
purpose,  or,  rather,  to  prevent  such  a  ratification  by  the  votes  of 
defendants.  There  is  no  doubt  that,  within  the  rule  in  Rothwell 
V.  Robinson,  39  Minn,  i,  38  N.  W.  Rep.  yy2,  the  plaintiffs  may 
bring  such  an  action  without  first  applying  to  the  corporate  au- 
thorities to  bring  it.  The  directors  against  whom  complaint  is 
made,  are  not  only  a  majority  of  the  directors,  but  they  own  a 
majority  of  the  stock,  so  that  any  application  either  to  the  board 
of  directors  or  to  the  body  of  stockholders  to  bring  the  action 
would  be  equivalent  to  asking  the  alleged  wrongdoers  to  bring 
suit  in  the  name  of  the  corporation  against  themselves.  The  law 
does  not  require  of  the  minority  stockholders  to  do  so  absurd  a 
thing  as  a  condition  of  seeking  relief  against  the  wrongful  acts  of 
the   directors   and   majority   stockholders.     The   court   below   de- 

*"A  contract  entered  into  by  a  corporation,  by  the  authority  or 
direction  of  its  trustees  with  themselves,  and  for  their  benefit,  or  a 
transfer  of  its  property  by  the  authority  to  the  trustees  to  themselves 
may  be  set  aside,  in  case  it  injures  any  public  interest  or  the  private 
interest  of  any  shareholder  or  creditor,  even  though  the  contract  or 
transfer  was  executed  in  good  faith  by  the  trustees.  Duncomb  v.  Rail- 
road Co.,  84  N.  Y.  190.  But  this  rule  is  not  broad  enough  to  condemn 
as  void  on  the  ground  of  public  policy  all  contracts  and  transfers  exe- 
cuted by  a  purely  private  business  corporation  with  or  to  its  trustees  in 
good  faith,  in  case  no  public  or  private  interest  is  harmed  thereby. 
Such  contracts  are  not  void,  but  voidable  at  the  election  of  those  who 
are  affected  by  the  fraud."  Skinner  v.  Smith,  134  N.  Y.  240,  per  Follett, 
C.  J.,  citing  Oil  Co.  v.  Marbury,  91  U.  S.  587;  Thomas  v.  Railroad  Co.. 
109  U.  S.  522;  Risley  v.  Railroad  Co.,  62  N.  Y.  240;  Barnes  v.  Brown,  80 
N.  Y.  527;  Munson  v.  Railroad  Co.,  103  N.  Y.  58;  Barr  v.  Railroad  Co., 
125  N.  Y.  263.— Ed. 


326  CORPORATE    MEETINGS    AND    ELECTIONS. 

cided  the  case  in  favor  of  the  defendants  on  the  proposition  that, 
ahhough  the  act  of  the  board  of  directors  was  voidable,  it  was 
not  ultra  vires,  and  was  capable  of  ratification;  and  where  a  ma- 
jority of  the  stockholders  have  power  to  ratify  the  unauthorized 
act  of  the  directors,  courts  will  not  interfere.  We  see  no  reason 
to  think  this  purchase  was  ultra  vires — that  the  corporation  had 
not  power  to  make  it.  And,  that  being  so,  it  may  be  conceded 
that  the  board  of  directors  had  authority  to  make  a  purchase  for 
the  corporation.  And  it  is  undoubtedly  true  that,  where  a  cor- 
poration has  power  to  do  a  certain  thing,  though  the  authority  to 
do  it  is  not  in  the  directors,  the  stockholders  may  ratify  their  act, 
if  they  assume  to  do  it  on  behalf  of  the  corporation.  But  this 
transaction  is  not  voidable  because  ultra  vires — because  there 
was  no  authority  in  the  directors  to  purchase;  but  it  is  voidable 
under  the  rule  that  one  having  authority  from  another  to  pur- 
chase or  sell  for  him  cannot  purchase  from  nor  sell  to  himself. 
To  do  so  is  in  law  a  fraud.  The  rule  is  absolute,  and  the  matter 
of  fraud  in  fact  is  immaterial.  The  party  for  whom  the  purchase 
or  sale  is  made  need  not  allege  nor  prove  fraud  or  injury,  but 
may  disaffirm  without  taking  any  risk.  The  rule  is  inflexible,  in 
order  to  prevent  fraud  on  the  part  of  one  holding  a  fiduciary 
relation,  by  making  it  impossible  for  him  to  profit  by  it,  thus 
removing  temptation  from  his  way.  This  court  has  steadily  ad- 
hered to  and  applied  the  rule  since  it  first  enunciated  it  in  Bald- 
win v.  Allison,  4  Minn.  25  (Gil.  11).  But  in  all  cases  of  the 
kind  the  principal  may,  with  full  knowledge  of  the  facts,  ratify 
what  has  been  done.  The  act  of  the  defendant  directors  was  a 
violation  of  this  rule,  and  the  purchase  was  not  binding  on  the 
corporation  until  ratified.  The  question  is  therefore  presented 
under  the  allegation  and  relief  asked  in  the  complaint,  had  the 
defendants  a  right  to  vote  as  stockholders  at  the  stockholders' 
meeting  called  for  the  purpose  upon  the  question  of  ratification? 
While  stockholders  in  a  corporation  owe  the  duty  of  good  faith 
to  each  other  in  the  management  of  the  affairs  of  the  corporation 
they  do  not  stand  to  each  other  in  a  fiduciary  relation  within  the 
rule  we  have  stated.  They  are  not  trustees  nor  agents  for  each 
other  in  the  matter  of  voting  upon  any  proposition  that  may  come 
before  a  meeting  of  the  stockholders.  In  voting,  each  must  be 
guided  by  his  own  judgment  as  to  what  is  for  the  best  interest 
of  the  corporation.  The  fact  that  he  may  have  a  personal  inter- 
est, separate  from  the  others  or  from  that  of  the  corporation  in 
the  matter  to  be  voted  upon,  does  not  affect  his  right  to  vote.  It 
is  not  to  be  understood  that  the  majority  stockholders  may  use 
their  power  of  voting  for  the  purpose  of  defrauding  the  minority. 
It  was  said  in  Gamble  v.  Queens  Co.  Water  Co.,  123  N.  Y.  91, 
25  N.  E.  Rep.  201,  in  which  the  right  of  a  stockholder  in  such  a 
case  to  vote  was  affirmed :  "In  such  cases  it  may  be  stated  that 
the  action  of  the  majority  of  the  shareholders  may  be  subjected 
to  the  scrutiny  of  a  court  of  equity  at  the  suit  of  the  minority 


PIKRCE    V.    THE    COMMONWEALTH.  327 

shareholders."  And  in  Transportation  Co.  v.  Beatty,  L.  R.  12 
App.  Cas.  589,  in  which  the  same  thing  was  held,  it  was  said,  in 
effect,  that  in  such  case  the  ratification  must  not  be  brought  about 
by  unfair  or  improper  means,  nor  be  illegal  or  fraudulent  or 
oppressive  towards  those  shareholders  who  oppose  it.  A  rule 
excluding  stockholders  from  the  right  to  vote  merely  because 
they  might  be  personally  interested  to  vote  in  a  particular  way, 
contrary  to  the  interests  of  the  other  stockholders,  would  be  likely 
to  lead  to  great  confusion.  The  rule  laid  down  in  the  two  cases 
cited  is  sufficient  to  secure  the  exercise  of  the  good  faith  which 
one  stockholder  owes  to  the  others. 
Judgment  affirmed. 


PIERCE   V.   THE   COMMONWEALTH. 

104  Pa.   St.   150. 

Cumulative    Voting. 

This  was  a  quo  warranto,  allowed  by  the  Court  of  Common 
Pleas  of  Mercer  County,  to  the  Commonwealth  of  Pennsylvania. 
ex  relatione  Wallace  Pierce,  James  B.  Pierce.  Frank  Pierce  and 
James  L.  Deeter,  directed  to  Jonas  J.  Pierce,  Enoch  Filer,  Joseph 
Forkner,  B.  H.  Henderson,  John  Phillips  and  H.  C.  Blossom,  re- 
quiring them  to  show  by  what  authority  they  exercised  the  office 
of  directors  of  the  Sharpsville  Railroad  Company. 

The  respondent  filed  an  answer  which  was,  on  motion,  allowed 
to  be  regarded  solely  as  a  plea,  and  the  relators  having  filed  a 
replication  thereto,  the  venue  was  removed  to  Venango  county 
and  the  case  tried  before  Taylor,  P.  J.,  and  a  jury,  when  the 
facts  appeared  as   follows : 

The  Sharpsville  Railroad  Company  was  a  railroad  corporation, 
incorporated  March  6,  1876,  under  the  act  of  April  4,  1868  (P. 
L.  62),  and  subject  to  the  provisions  of  the  Act  of  February  19, 
1849,  entitled  an  "Act  regulating  railroad  companies"  (P.  L.  79). 
Its  capital  stock  consisted  of  7,000  shares,  all  of  which  had  been 
issued  before  January  8,  1883.  On  that  day  the  company  held  an 
election  for  a  president  and  six  directors.  It  was  admitted  that 
there  was  no  irregularity  about  the  election,  that  it  was  properly 
called  and  at  the  proper  time.  At  the  election  6.433  shares  of 
the  total  7.000  were  voted  for  directors  ;  of  these  3,396  were  for 
the  respondents  and  3,037  were  cumulated  and  distributed  among 
the  four  relators,  making  the  actual  votes  cast  as   follows : 

Jonas  J.   Pierce 3-396  H.    C.    Blossom 3-396 

Enoch  Filer 3-396  Wallace  Pierce 4-557- 

B.   H.   Flenderson 3-396  Frank    Pierce 4-556. 

Joseph   Forkner 3-396  James  B.  Pierce 4-555- 

John    Phillips 3-396  James  L.  Deeter 4-552. 


228  CORPORATE    MEETINGS    AND    ELECTIONS. 

It  was  testified  that  none  of  the  votes  for  the  relators  were 
cast  until  after  those  for  the  respondents;  nor  was  any  offer  to 
vote  made  by  those  voting  for  the  relators  until  all  the  stock  of 
the  respondents  had  been  polled. 

There  was  evidence  that  some  of  the  stock  that  was  voted  for 
the  relators,  amounting  to  two  hundred  shares,  had  been  hypothe- 
cated and  assigned  in  blank.  All  the  votes  cast  for  the  relators 
were  folded  up  and  indorsed  with  the  name  of  the  voter  and  the 
number  of  shares  voted.  These  ballots  had  been  prepared  pre- 
vious to  the  election  by  one  of  the  relators  who  had  the  plan 
ready  for  some  time.  It  was  testified  that  he  had  said:  _  "The 
Erie  gentlemen  did  not  expect  that  I  would  play  this  trick  on 
them.  They  didn't  think  I  had  sealed  these  votes  up  and  put 
them  away  in  my  safe  two  weeks  before  the  election,  and  I 
didn't  let  anybody  know  it."  It  was  denied,  however,  that  this 
language  had  been  used.  Prior  to  the  counting  of  the  votes,  no 
one  claimed  the  right  to  cumulate  his  vote. 

The  votes  cast  on  the  cumulative  system  were  not  counted  by 
the  judges  of  election,  and  the  respondents  were  accordingly  de- 
clared  elected. 

The  respondents  asked  the  court  to  charge:  "That  stock- 
holders of  railroad  companies  constructed  for  general  public  use 
have  no  legal  right  to  cumulate  their  votes  at  any  corporate  elec- 
tion held  by  said  stockholders,  and  if  such  corporations  are  in- 
cluded in  the  provisions  of  section  4  of  article  16  of  the  Consti- 
tution of  Pennsylvania,  the  legislature  has  not  passed  any  law 
for  carrying  into  effect  the  provisions  of  said  article,  so  far  as 
relates   to   such   corporations." 

The  court  answered  this  point  in  the  negative  and  charged, 
inter  alia,  as  follows: 

"There  is  no  controversy  but  that  the  respondents  voted  open 
ballots.  If  the  evidence  is  believed,  it  was  discovered  after  the 
votes  were  polled  for  the  first  time,  that  the  relators  had  with 
unanimity  voted  a  cumulative  ballot,  that  is,  they  voted  for  four 
persons  only,  thus  cumulating  their  votes  upon  four  persons. 
Now,  the  whole  number  of  votes  for  the  plaintiff  as  cumulated 
amounted  to  four  thousand  five  hundred  and  fifty-seven  (4,557), 
that  deducting  two  hundred  shares,  which  were  hypothecated, 
and  which  the  respondents  allege  the  relators  were  not  legally 
entitled  to  vote,  upon  deducting  these  two  hundred  shares  which 
had  been  hypothecated,  and  there  still  would  be  a  majority,  if 
you  believe  the  evidence,  in  favor  of  the  Pierces,  as  follows: 
Wallace  Pierce,  4.357;  Frank  Pierce,  4.356;  Jas.  B.  Pierce,  4,355, 
and  James  L.  Deeter,  4,352.  That  is  the  amount  of  the  cumula- 
tive vote  upon  these  four  candidates  for  the  office  of  directors. 
"We  instruct  you,  in  our  opinion,  that  either  party  at  this  elec- 
tion, or  any  one  of  either  party,  had  the  right  to  cumulative  vot- 
ing. That  is,  any  one  or  more  could  cumulate  his  vote  upon  one 
or  as  many  candidates  as  he  or  they  saw  fit.     The  ballot  was  in 


PIERCE    V.    THE    COMMONWEALTH.  329 

proper  form,  and  we  can  see  no  impropriety  in  it.  The  only 
matter  under  the  law,  or  which  seems  to  have  been  required  by 
the  law,  was  that  there  should  be  upon  the  back  of  the  ballot 
the  name  of  the  party  voting,  and  the  number  of  shares  he 
claimed  to  have  the  right  to  vote  upon.  Under  this  Constitution 
we  say  to  you,  these  relators  had  the  right  to  cumulate  their 
votes  upon  one  or  more  of  the  candidates  as  they  saw  fit.  We 
cannot  legislate — we  can  only  execute  the  laws  as  we  understand 
them. 

"There  is  no  general   rule  of  law  but  will  work  hardships  in 
particular   cases,   but   the   remedy   is   with   the   legislature   or  con-    * 
stitutional  convention;  not  wuth  us.     If  there  be  an  evil  whereby 
a   minority  has   acquired   control   of   this   railroad,   the   remedy   is 
not  with  us.     We  simply  execute  the  law  as  we  find  it. 

"Now,  gentlemen,  as  to  whether  there  was  any  fraud  in  the 
conducting  of  that  election.  As  has  been  well  remarked  by  coun- 
sel, fraud  vitiates  everything,  renders  null  and  void  all  acts,  and 
a  court  of  justice  is  the  last  place  on  earth  where  it  ought  to  find 
shelter.  But  fraud  is  never  presumed — it  must  be  proven.  It 
is  proven  in  the  same  manner  any  other  fact  is  proven ;  that  is, 
the  jury  must  be  satisfied  from  the  weight  of  evidence  that  there 
was  fraud  perpetrated.  The  counsel,  it  seems,  have  deemed  this 
question  of  so  little  importance  upon  either  side,  that  they  have 
not  addressed  you  upon  it.  We  say  to  you  that,  in  our  opinion 
[mere  secrecy  in  the  conduct  of  these  gentlemen  upon  either  side 
by  withholding  from  the  other  party,  whom  they  intended  to 
vote  for,  or  that  they  intended  to  cumulate  their  votes,  does  not 
amount  to   fraud]." 

\'erdict  for  the  relators,  and  judgment  of  ouster  thereon  against 
the  respondents,  whereupon  the  respondents  took  this  writ,  assign- 
ing for  error,  inter  alia,  the  refusal  of  respondents'  point  above 
noted,  and  so  much  of  the  general  charge  as  is  included  in 
brackets. 

The  opinion  of  the  court  was  delivered  October  22,  1883,  by 
Gordon,  J. 

About  the  correctness  of  the  ruling  of  the  learned  judge  of 
the  court  below  in  this  case  we  have  no  doubt.  It  seems  to  have 
been  admitted,  in  the  outstart  of  this  trial,  that  the  election  of 
the  Sth  of  January,  1S83,  was  properly  called,  was  held  at  the 
proper  time,  and  was  conducted  in  an  orderly  and  regular  man- 
ner. Nor  is  there  any  doubt  but  that  the  relators  received  the 
highest  number  of  votes  cast  for  directors  at  that  election.  It 
is  said,  however,  that  this  result  was  brought  about  by  the  cumu- 
lation of  the  votes  of  the  relators  upon  four  out  of  the  six  can- 
didates proposed  for  election.  But  this  they  certainly  had  a 
right  to  do,  or  we  fail  correctly  to  read  the  Constitution  of  1874: 
"In  all  elections  for  directors  or  managers  of  a  corporation,  each 
member  or  shareholder  may  cast  the  whole  number  of  his  votes 
for  one  candidate,  or  distribute  them  upon  two  or  more  candi- 


330  CORPORATE    MEETINGS    AND    ELECTIONS. 

dates,  as  he  may  prefer."  Article  i6,  section  4.  This  section  ta 
us  seems  very  plain  and  unambiguous.  If  there  are  six  directors 
to  be  elected,  the  single  shareholder  has  six  votes,  and  contrary 
to  the  old  rule,  he  may  cast  those  six  votes  for  a  single  one  of 
the  candidates,  or  he  may  distribute  them  to  two  or  more  of  such 
candidates  as  he  may  think  proper.  He  may  cast  two  ballots  for 
each  of  three  of  the  proposed  directors,  three  for  two,  or  two 
for  one,  and  one  each  for  four  others,  or  finally,  he  may  cast 
one  vote  for  each  of  the  six  candidates.  Now,  as  this  Sharps- 
ville  Railroad  Company  was  incorporated  since  the  adoption  of 
the  new  Constitution,  it  is  necessarily  subjected  thereto,  and  must 
be  governed  by  its  provisions.  But  the  provision  above  cited 
vested  in  the  relators,  as  stockholders,  the  absolute  right  to  vote 
as  they  did,  and  if,  as  a  consequence  of  the  exercise  of  such  right, 
their  candidates  had  the  highest  number  of  votes  cast  at  that 
election,  they  are  the  rightful  directors  of  the  corporation.  But 
it  is  said  this  provision  is  but  directory,  and  it  cannot  go  into 
effect  without  some  legislative  action  directing  the  manner  of  its 
exercise.  To  this  proposition  we  cannot  assent.  There  is  no 
alteration  required  in  the  mode  of  conducting  corporate  elections ; 
each  company  continues  to  use  that  method  prescribed  by  its 
charter,  and  the  constitutional  right  is  one  that  belongs  solely  and 
exclusively  to  the  individual  shareholder.  He  may  exercise  it 
or  not,  as  to  him  may  seem  proper;  but  whether  he  does  so  ex- 
ercise such  right  or  not,  the  ordinary  manner  of  conducting  the 
corporate  election  is  in  no  wise  interfered  with.  Legislative  ac- 
tion is,  therefore,  uncalled  for;  it  would  be  useless  to  alter  the 
present  mode  of  election,  and  with  the  right  itself  the  General 
Assembly  cannot  meddle.  Again,  it  is  urged,  that  from  the 
heading  of  this  section,  it  is  obviously  intended  to  apply  only  to 
private  corporations,  and  therefore  it  applies  not  to  the  case  in 
hand.  To  the  first  part  of  this  proposition  we  assent,  but  dissent 
as  to  the  second  part.  Railroad  and  canal  companies  are  private 
corporations.  This  we  have  decided  in  point  twice  within  the 
last  two  years ;  once  in  the  case  of  Timlow  v.  The  Philadelphia 
&  Reading  Railroad  Company,  3  Ont.  284,  and  again  in  the  case 
of  the  Pittsburgh  &  Lake  Erie  Railroad  Company  v.  Bruce,  6 
Ont.  23.  If,  however,  these  are  not  enough  for  the  establish- 
ment of  the  point  in  issue,  we  may  cite  Pierce  on  Railroads,  p.  i  ; 
Morawetz  on  Private  Corporations,  §  2,  and  Redfield  on  the  Law 
of  Railways,  vol.  i,  52-3.  The  last  named  author  cites  many 
books  for  the  position  assumed,  which  anyone  curious  about  such 
matters  may  consult  for  himself.  So  in  the  case  of  the  Trustees 
of  the  Presbyterian  Society  v.  The  Auburn  &  Rochester  Rail- 
road Co.,  3  Hill,  567,  it  is  said  that  a  railroad  company  is  not 
public,  nor  does  it  stand  in  the  place  of  the  public.  It  is  but  a 
private  corporation  over  whose  rails  the  public  may  travel  if 
they  choose  to  ride  in  its  cars.  Indeed,  we  regard  it  as  a  mis- 
nomer to  attach   even  the  name   "quasi   public   corporation"   to   a 


PIERCE   V.   THE   COMMONWEALTH.  33I 

railroad  company,  for  it  has  none  of  the  features  of  such  cor- 
porations, if  we  except  its  quaHfied  right  of  eminent  domain,  and 
this  it  has  because  of  the  right  reserved  to  the  pubHc  to  use  its 
way  for  travel  and  transportation.  Its  officers  are  not  public 
officers,  and  its  business  transactions  are  as  private  as  those  of 
a  banking  house.  Its  road  may  be  called  a  quasi  public  highway, 
but  the  company  itself  is  a  private  corporation  and  nothing  more. 
We  have,  therefore,  no  hesitation  in  saying  that  it  is  embraced 
by  the  provisions  of  the  4th  section  of  article  16  of  the  consti- 
tution. 

Finally,  we  have  the  allegation  of  fraud,  in  this,  that  the 
relators  did  not  give  the  respondents  notice  in  advance,  that  they 
were  going  to  cumulate  their  votes  on  four  candidates.  But  as 
this  was  simply  the  exercise  of  a  constitutional  right,  of  which 
the  respondents  were  presumed  to  be  as  well  informed  as  the 
relators,  and  as  the  Constitution  placed  its  exercise  entirely 
within  the  volition  of  the  individual  stockholder,  we  do  not  see 
who  has  the  right  to  restrain  that  volition  by  the  imposition  of 
any  condition  whatever,  or  to  compel  the  voter  to  say  in  advance 
whether  he  will  or  will  not  use  that  privilege.  Up  to  the  very 
moment  of  voting  he  has  the  positive  right  to  exercise  his  own 
will  in  this  matter,  and  to  us  that  sounds  like  a  strange  allega- 
tion which  charges  the  plaintiffs  with  fraud  upon  the  ground 
simply  that  they  did  that  only  which  the  supreme  law  of  the 
State  authorized  them  to  do,  that  is,  quietly  and  according  to 
their  own  will,  distribute  their  votes  upon  four  candidates  instead 
of  six.  With  the  learned  judge  of  the  court  below,  we  must 
agree,  that  in  this  there  has  been  no  wrong  committed  upon  the 
respondents. 

Judgment  affirmed. 


CHAPTER  XV. 

DIRECTORS,   OFFICERS   AND   AGENTS — THE    MANAGEMENT    OF   CORPORA- 
TIONS. 

RAILWAY  CO.  V.  ALLERTON. 

1873.     18  Wallace  (U.  S.),  233,  21  L.  ed.  902. 

Pozvcrs  of  Directors — Increase  of  Capital. 

Appeal  from  the  Circuit  Court  of  the  Northern  District  of 
Illinois ;  the  case  being  thus : 

The  Chicago  City  Railway  Company  was  a  corporation  owning 
a  street  railroad  in  Chicago.  The  directors  of  the  company,  with- 
out consulting  the  stockholders  or  calling  a  meeting  of  them,  re- 
solved to  increase  the  capital  stock  of  the  company  from  $1,250,- 
000  to  $1,500,000.  To  this  one  Allerton,  who  was  a  stockholder, 
objected,  and  filed  a  bill  praying  for  an  injunction  to  prevent  the 
increase.  His  position  was  that  it  could  not  be  lawfully  made 
without  the  concurrence  of  the  stockholders,  and  in  support  of 
this  view  he  relied  upon  the  constitution  of  Illinois,  adopted  in 
July,  1870,  by  the  thirteenth  section  of  the  eleventh  article  of 
which  it  is  declared  as   follows: 

"No  railroad  corporation  shall  issue  any  stock  or  bonds,  except 
for  money,  labor,  or  property  actually  received  and  applied  to  the 
purposes  for  which  such  corporation  was  created,  and  all  stock- 
dividends,  and  other  fictitious  increase  of  the  capital  stock,  or 
indebtedness  of  any  such  corporation,  shall  be  void.  The  capital 
stock  of  no  railroad  corporation  shall  be  increased  for  any  pur- 
pose, except  upon  giving  sixty  days'  public  notice  in  such  manner 
as  may  be  provided  by  law." 

He  also  relied  on  an  act  of  the  legislature  of  Illinois  passed 
March  26,  1872,  to  execute  and  carry  out  the  above  provisions 
of  the  constitution,  by  which,  amongst  other  things,  it  was 
enacted  that  no  corporation  should  change  its  name  or  place  of 
business,  increase  or  decrease  its  capital  stock,  or  the  number  of 
its  directors,  or  consolidate  with  other  corporations,  without  a 
vote  of  two-thirds  of  the  stock  at  a  stockholders'  meeting. 

The  railway  company,  in  its  answer,  relied  upon  its  charter, 
granted  February  14,  1859,  the  third  and  fourth  sections  of 
which  were  as  follows : 

"Section  3.  The  capital  stock  of  said  corporation  shall  be  one 
hundred  thousand  dollars,  and  may  be  increased  from  time  to 
time,  at  the  pleasure  of  said  corporation. 

"Section  4.     All  the  corporate  powers  of  said  corporation  shall 


RAILWAY    CO.    V.    ALLF.RTON.  333 

be   vested   in   and   exercised   by   a   board   of   directors,   and   such 
officers  and  agents  as  said  board  shall  appoint." 

The  position  of  the  company  was  that  the  third  section  con- 
ferred an  unrestricted  right  to  increase  the  capital  stock  at  will, 
and  that  the  fourth  vested  this  power  in  the  board  of  directors, 
and  that  the  constitutional  provision  and  act  above  referred  to, 
if  applied  to  this  corporation,  would  impair  the  validity  of  the 
contract.  It  was  further  set  up,  however,  that  the  said  provision 
did  not  apply  to  railways  worked  by  horsepower.  The  court  be- 
low decreed  in  favor  of  the  complainant  and  the  company  took 
the  present  appeal. 

MR.  JUSTICE  BRADLEY  delivered  the  opinion  of  the  court. 

Without  attempting  to  decide  the  constitutional  question,  or  to 
give  a  construction  to  the  act  of  the  legislature,  we  are  saisfied 
that  the  decree  must  be  affirmed  on  the  broad  ground  that  a 
change  so  organic  and  fundamental  as  that  of  increasing  the 
capital  stock  of  a  corporation  beyond  the  limit  fixed  by  the  char- 
ter cannot  be  made  by  the  directors  alone,  unless  expressly  au- 
thorized thereto.  The  general  power  to  perform  all  corporate 
acts  refers  to  the  ordinary  business  transactions  of  the  corpora- 
tion, and  does  not  extend  to  a  reconstruction  of  the  body  itself, 
or  to  an  enlargement  of  its  capital  stock.  A  corporation,  like  a 
partnership,  is  an  association  of  natural  persons  who  contribute 
a  joint  capital  for  a  common  purpose,  and  although  the  shares 
may  be  assigned  to  new  individuals  in  perpetual  succession,  yet 
the  number  of  shares  and  amount  of  capital  cannot  be  increased, 
except  in  the  manner  expressly  authorized  by  the  charter  or 
articles  of  association. 

Authority  to  increase  the  capital  stock  of  a  corporation  may 
undoubtedly  be  conferred  by  a  law  passed  subsequent  to  the  char- 
ter ;  but  such  a  law  should  regularly  be  accepted  by  the  stock- 
holders. Such  assent  might  be  inferred  by  subsequent  acqui- 
escence; but  in  some  form  or  other  it  must  be  given  to  render 
the  increase  valid  and  binding  on  them.  Changes  in  the  purpose 
and  object  of  an  association,  or  in  the  extent  of  its  constituency 
or  membership,  involving  the  amount  of  its  capital  stock,  are 
necessarily  fundamental  in  their  character,  and  can  not,  on  general 
princii)les,  be  made  without  the  express  or  implied  consent  of  the 
members.     The  reason  is  obvious. 

First,  as  it  respects  the  purpose  and  objects.  This  may  be  said 
to  be  the  final  cause  of  the  association,  for  the  sake  of  which  it 
was  brought  into  existence.  To  change  this  without  the  consent 
of  the  associates  would  be  to  commit  them  to  an  enterprise  which 
they  never  embraced,  and  would  be  manifestly  unjust. 

Secondly,  as  it  respects  the  constituency,  or  capital  and  mem- 
bership. This  is  the  next  most  important  and  fundamental  point 
in  the  constitution  of  a  body  corporate.  To  change  it  without 
the  consent  of  the  stockholders  would  be  to  make  them  members 


334      DIRECTORS,    OFFICERS    AIsD    AGENTS — MANAGEMENT,     ETC. 

of  an  association  in  which  they  never  consented  to  become  such. 
It  would  change  the  relative  influence,  control,  and  profit  of  each 
member.  If  the  directors  alone  could  do  it,  they  always  perpet- 
uate their  own  power.  Their  agency  does  not  extend  to  such  an 
act  unless  so  expressed  in  the  charter,  or  subsequent  enabling  act ; 
and  such  subsequent  act,  as  before  said,  would  not  bind  the  stock- 
holders without  their  acceptance  of  it,  or  assent  to  it  in  some 
form.  Even  when  the  additional  stock  is  distributed  to  each 
stockholder  pro  rata,  it  would  often  work  injustice,  because  many 
of  the  stockholders  might  be  unable  to  take  their  respective 
shares,  and  might  thus  lose  their  relative  interest  and  influence 
in  the  corporate  concerns. 

These  conclusions  flow  naturailly  from  the  character  of  such 
associations.  Of  course,  the  associates  themselves  may  adopt  or 
assent  to  a  different  rule.  If  the  charter  provides  that  the  capital 
stock  may  be  increased,  or  that  a  new  business  may  be  adopted 
by  the  corporation,  this  is  undoubtedly  an  authority  for  the  cor- 
poration (that  is,  the  stockholders)  to  make  such  a  change  by  a 
stockholders'  vote,  in  the  regular  way.  Perhaps  a  subsequent 
ratification  or  assent  to  a  change  already  made,  would  be  equally 
effective.  It  is  unnecessary  to  decide  that  point  at  this  time.  But 
if  it  is  desired  to  confer  such  a  power  on  the  directors,  so  as  to 
make  their  acts  binding  and  final,  it  should  be  expressly  con- 
ferred. 

Where  the  stock  expressly  allowed  by  a  charter  has  not  been 
all  subscribed,  the  power  of  the  directors  to  receive  subscriptions 
for  the  balance  may  stand  on  a  different  footing.  Such  an  act 
might,  perhaps,  be  considered  as  merely  getting  in  the  capital  al- 
ready provided  for  the  operations  and  necessities  of  the  company, 
and,  therefore,  as  belonging  to  the  orderly  and  proper  administra- 
tion of  the  company's  affairs.  Even  in  such  case,  however,  pru- 
dent and  fair  directors  would  prefer  to  have  the  sanction  of  the 
stockholders  to  their  acts.  But  that  is  not  the  present  case,  and 
need  not  be  further  considered. 

Decree   affirmed.^ 


NORTH   HUDSON   MUTUAL   BUILDING   &  LOAN  ASSN. 

v.  CHILDS. 

1892.     82  Wis.  460,  52  N.  W.  600,  33  Am.  St.  57. 

Liabilities   of  Directors  for  Negligence   and   Misfeasance. 

PINNEY,  J.:  I.  The  corporation  plaintiff  has  a  remedy  against 
its  directors  and  officers  for  negligence,  fraud,  breaches  of  trust, 
or  for  acts  done  in  excess  of  their  authority,  and  the  case  against 

'See,  also.  Commercial  Nat.  Bank  v.  Weinhard,  192  U.  S.  243,  48  L. 
cd.  425,  24  Sup.  Ct.  253.— Ed. 


NORTH    HUDSON    MUTUAL   BLDG.    &    LOAN    ASSN.    V.    CHILDS.  335 

each  is  distinct,  depending  upon  the  evidence  against  him,  unless 
two  or  more  have  joined  or  participated  in  the  wrongful  act,  in 
which  case,  all  participants  may  be  joined  in  the  suit.  And  where 
the  act  is  illegal,  or  in  violation  of  some  positive  law,  the  author- 
ities indicate  that  there  is  no  right  of  contribution  where  one  only 
is  sued  and  charged ;  and  therefore  it  is  held  in  many  cases  that  it 
is  not  necessary  to  make  all  the  directors  parties  who  have  more 
or  less  joined  in  the  act  complained  of.  Thomp.  Liab.  Off.  in 
notes  352,  353,  411,  and  cases  cited.  A  different  rule  is  main- 
tained in  the  modern  cases  in  England  and  America,  in  cases 
where  the  wrongful  act  is  the  result  of  negligence  or  gross  mis- 
judgment,  and  is  not,  in  and  of  itself,  illegal,  or  a  violation  of 
some  positive  law,  as  will  be  shown  hereafter;  and  there  exists 
high  authority  in  such  cases  for  holding  that,  in  all  cases  where 
contribution  would  be  allowed  in  equity,  there  those  who  are 
liable  to  contribute  are  necessary  parties  to  a  suit  in  equity  to 
obtain  redress  for  the  loss  which  the  corporation  has  suffered. 
The  remedy  of  the  corporation  for  the  wrong  done  is  either  at 
law  or  in  equity,  according  to  the  nature  of  the  case.  Hence,  in 
every  such  case  as  the  present,  it  is  important  to  determine  at  the 
outset  whether  the  action  shall  be  or  is  a  legal  or  equitable  one, 
and,  if  the  latter,  whether  the  necessary  parties  are  before  the 
court,  to  enable  it  to  make  a  proper  and  complete  determination 
of  the  controversy.  This  action  has  been  treated  throughout  by 
the  plaintiff  and  by  the  circuit  court  as  a  legal  action,  both  in  the 
demand  for  judgment  and  in  the  course  taken  at  the  trial,  a  trial 
by  jury  having  been  waived,  and  the  court  ruling  that  no  evi- 
dence of  liability  was  competent  that  did  not  equally  affect  both 
defendants;  and,  after  judgment  by  the  remission  of  damages  for 
the  periods  mentioned,  on  the  ground  that  for  these  sums  the 
defendants  were  not  jointly  liable,  though  this  fact  was  either 
overlooked  or  was  not  regarded  in  the  decision  of  the  case. 

2.  The  complaint  is  not  entirely  definite  and  clear  in  the  alle- 
gations upon  which  the  liability  of  the  defendants  is  rested,  but 
groups  together  grounds,  not  entirely  congruous,  when  stated  in 
the  same  cause  of  action,  as  the  charge  against  them  is  gross  neg- 
lect, mismanagement,  and  inattention  of  the  defendants  "to  the 
duties  of  their  said  offices,"  and  they  are,  to  some  extent,  at 
least,  attempted  to  be  charged  for  negligence  or  misconduct  in 
their  respective  offices  of  president  and  treasurer,  and  also  as 
mernbers  of  the  board  of  directors,  the  by-laws  making  them  ex 
officio  such.  Some  of  the  acts  as  to  which  negligence  and  miscon- 
duct are  predicated  lie  wholly  outside  the  scope  of  the  duties  of 
either  one  or  both  the  president  and  treasurer.  In  the  main,  the 
gravaman  of  the  case  seems  to  be  that  the  defendants  have 
exceeded  their  respective  powers  as  such  president  and  treasurer 
in  dealing  with  the  property  and  property  rights  of  the  plaintiff, 
and  have  usurped  the  powers  of  the  board  of  directors  in  these 
respects  and  it  is  expressly  charged  in  the  7th,  9th,   loth,   nth, 


336      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,    ETC. 

I2th,  13th,  and  14th  "causes  of  action"  (so  designated)  that 
they  did  the  acts  complained  of  "without  the  knowledge,  con- 
sent, and  approval  of  the  board  of  directors;"  and  the  Jast  of 
these  causes  of  action,  grouping  the  plaintiff's  losses  in  one 
aggregate  sum  of  $22,000,  charges  "that  between  the  ist  of 
March,  1882,  and  the  ist  of  September,  1887,  the  plaintiff, 
through  the  gross  neglect,  mismanagement,  and  inattention  of 
the  defendants  to  the  duties  of  their  said  offices,  has  lost  in  dues, 
interest,  and  charges  on  stocks  and  loans,  and  on  loans  made  by- 
defendants,  and  in  the  wrongful  cancellation  of  stock  by  the 
defendants,  and  paying  thereon  more  than  the  holders  thereof 
were  entitled  to  receive  and  be  paid  by  said  corporation,  and 
without  the  knowledge,  consent,  or  authority  of  the  board  of 
directors  of  said  corporation,  and  without  the  knowledge,  con- 
sent, or  authority  of  the  stockholders  thereof,  to  the  amount  of 
$22,000."  The  first  five  "causes  of  action"  (so  designated)  pro- 
ceed entirely  upon  the  ground  of  gross  neglect  and^  mismanage- 
ment of  the  defendants,  and  there  are  items  also^  in  the  other 
causes  of  action  based  on  that  ground.  The  circuit  court  based 
the  finding  against  the  defendants  on  the  ground  "of  gross  negli- 
gence and  usurpation  of  authority  not  given  them  by  the  by-laws 
but  reserved  to  the  board  of  directors."  These  different  allega- 
tions thus  blended  in  the  several  so-called  "causes  of  action," 
which  are  in  fact  but  enumerations  of  items  of  liability  under 
what  is  really  but  one  general  count,  require  different  answers 
and  different  evidence  to  meet  them,  creating  difficulties  of  pro- 
cedure which  can  be  best  dealt  with  and  overcome  in  an  equitable 
action.  We  think  that  the  case  made  by  the  pleadings  and  proofs 
is  not  one  where  an  adequate  and  proper  remedy  by  legal  action 
can  be  obtained,  but  the  action  must  be  treated  as  an  equitable 
one;  and  that  the  circuit  court  erred  in  dealing  with  it  on  any 
other  basis.  As  a  recovery  in  a  legal  action,  the  judgment  must 
stand  or  fall  on  the  liability  of  the  defendants  as  president  and 
treasurer,  for  no  recovery  can  be  had  at  law  against  a  minority 
of  the  board  of  directors  for  misconduct  or  negligence,  inasmuch 
as  they  can  act  only  when  lawfully  assembled,  and  their  duties  as 
such  are  devolved  on  them  as  a  board,  and  not  individually. 
Insurance  Co.  v.  Jenkins,  3  Wend.  134;  Gaffney  v.  Colvill,  6  Hill, 

3.  Much  argument  was  had  upon  the  rule  of  liability  of  cor- 
porate officers  in  cases  such  as  this,  presenting  for  consideration 
some  questions  in  respect  to  which  a  considerable  difference  of 
opinion  has  prevailed.  The  liability  of  officers  to  the  corporation 
for  damages  caused  by  negligent  or  unauthorized  acts  rests  upon 
the  common-law  rule,  which  renders  every  agent  liable  who  vio- 
lates his  authority  or  neglects  his  duty  to  the  damage  of  his  prin- 
cipal. It  seems  to  be  now  universally  agreed  that,  no  matter 
whether  the  act  is  prohibited  by  the  charter  or  by-laws,  the  lia- 
bility is  on  the  ground   of  violation   of   authority   or   neglect   of 


NORTH    HUDSON    MUTUAL   BLDG.   &   LOAN   ASSN.   V.   CHILDS.         33/ 

duty.  Thomp.  Liab.  Off.  357;  Briggs  v,  Spaulding,  141  U.  S. 
146,  II  Sup.  Ct.  Rep.  924.  There  can  be  no  doubt  that,  if  the 
directors  or  officers  of  a  company  do  acts  clearly  beyond  their 
power,  whereby  loss  ensues  to  the  company,  or  dispose  of  its 
property  or  pay  away  its  money  without  authority,  they  will  be 
required  to  make  good  the  loss  out  of  their  private  estates. 
Thomp.  Liab.  Off.  375 ;  Discount  Co.  v.  Brown,  L.  R.,  8  Eq.  381 ; 
Flitcroft's  Case,  21  Ch.  Div.  519;  Insurance  Co.  v.  Jenkins,  3 
Wend.  130 — and  many  other  authorities  to  this  effect  were  cited 
by  the  respondent's  counsel.  This  is  the  rule  where  the  disposi- 
tion made  of  money  or  property  of  the  corporation  is  one  either 
not  within  the  lawful  power  of  the  corporation,  or,  if  within  the 
power  of  the  corporation,  is  not  within  the  power  or  authority 
of  the  particular  officer  or  officers.  Where  the  ground  of  liability 
is  for  nonfeasance,  negligence,  or  mis  judgment  in  respect  to  mat- 
ters within  the  scope  of  the  proper  powers  of  the  officer,  he  will 
be  held  responsible  only  for  a  failure  to  bring  to  the  discharge  of 
his  duties  such  degree  of  attention,  care,  skill,  and  judgment  as 
are  ordinarily  used  and  practiced  in  the  discharge  of  such  duties 
or  employments;  the  degree  of  care,  skill,  and  judgment  depend- 
ing upon  the  subject  to  which  it  is  to  be  applied,  the  particular 
circumstances  of  the  case,  and  the  usages  of  business.  In  respect 
to  directors,  or  those  acting  ex  officio  as  such,  the  rule  of  liability 
has  been  the  subject  of  much  discussion  in  the  recent  case  of 
Briggs  V.  Spaulding,  141  U.  S.  132,  11  Sup.  Ct.  Rep.  924,  in 
which,  although  there  was  a  strong  dissent,  the  rule  may  be 
regarded  as  settled,  in  the  federal  courts,  at  least,  and  in  the 
courts  of  several  of  the  states,  as  there  laid  down,  and  to  the 
effect  that  directors,  although  often  called  "trustees,"  are  not 
such  in  any  technical  sense,  but  that  they  are  mandataries,  the 
relation  between  them  and  the  corporation  being  rather  that  of 
principal  and  agent,  but  under  circumstances  they  may  be  treated 
as  occupying,  in  consequence  of  the  powers  conferred  on  them, 
the  position  of  trustees  to  cestuis  que  trustent ;  that  the  degree  of 
care  required  of  them  depends  upon  the  subject  to  which  it  is  to 
be  applied,  and  each  case  is  to  be  determined  upon  its  own  cir- 
cumstances ;  that,  as  they  render  their  services  gratuitously,  they 
are  not  to  be  held  to  the  degree  of  responsibility  of  bailees  for 
hire,  or  expected  to  devote  their  whole  time  and  attention  to 
their  duties ;  that  they  are  not,  in  the  absence  of  any  element  of 
positive  misfeasance,  and  solely  on  the  ground  of  passive  negli- 
gence, to  be  held  liable,  unless  their  negligence  is  gross,  or  they 
are  fairly  subject  to  the  imputation  of  a  want  of  good  faith.  It 
is  to  be  remembered  that  they  have  the  same  interests  to  protect 
and  subserve  as  other  stockholders,  and  self-interest  naturally 
prompts  them  to  look  after  their  own,  and  the  degree  of  care 
they  are  bound  to  exercise  is  that  which  ordinarily  prudent  and 
diligent  men  would  exercise  under  similar  circumstances  in  re- 
spect to  a  like  gratuitous  employment,   regard  being  had  to  the 

22 — Private  Corp. 


^^8      DIRECTORS,     OFFICERS     AND    AGENTS MANAGEMENT,     ETC. 

usages  of  business  and  the  circumstances  of  each  particular  case ; 
that  they  are  not  Hable,  in  the  absence  of  fraud  or  intentional 
breach  of  trust,  for  negligence,  mistakes  of  judgment  and  bad 
management  in  making  investments  on  doubtful  or  insufficient 
security.  Where  they  have  not  profited  personally  by  their  bad 
management,  or  appropriated  any  of  the  property  of  the  corpora- 
tion to  their  own  use,  courts  of  equity  treat  them  with  indulgence. 
Were  a  more  rigid  rule  to  be  applied,  it  would  be  difficult  to  get 
men  of  character  and  pecuniary  responsibility  to  fill  such  posi- 
tions. Thomp.  Liab.  Ofif.  357;  Beach,  Corp.  |  249.  These  views 
are  sustained  in  Briggs  v.  Spaulding,  supra;  Spering's  Appeal,  71 
Pa.  St.  i;  Association  v.  Coriell,  34  N.  J.  Eq.  383,  392;  Swentzel 
V.  Bank  (Pa.  Sup.),  23  Atl.  Rep.  413;  In  re  Dean  Coal  Min.  Co., 
10  Ch.  Div.  450;  Ackerman  v.  Halsey,  37  N.  J.  Eq.  363;  Hun  v. 
Cary,  82  N.  Y.  65;  In  re  Denham,  25  Ch.  Div.  752;  Watt's  Ap- 
peal, 78  Pa.  St.  391.  These  views  are  applicable,  we  think,  to 
the  case  of  all  officers  serving  and  acting  within  the  scope  of  their 
authority  gratuitously,  or  practically  so.  The  rule  of  liability  in 
case  of  service  for  reward  is  well  understood,  and  need  not  be 
repeated.  It  has  been  thought  best  to  indicate  the  rules  we 
think  applicable  to  the  liability  of  directors  and  other  officers  of 
corporations,  as  these  questions  were  fully  discussed  at  the  argu- 
ment, and  in  view  of  the  probable  importance  of  these  questions 
in  the  future  disposition  of  this  cause. 

The  finding  of  the  circuit  court  that  no  directors'  meetings  were 
held  within  the  period  mentioned,  and  that  the  business  of  the 
corporation,  consisting  of  issuing  stock,  making  loans,  accepting 
prepayment  of  loans,  and  in  fact  all  the  business  of  the  corpora- 
tion, was  transacted  without  any  direction  of  the  board  of  direct- 
ors by  the  defendants  and  Harvey,  the  secretary,  since  deceased, 
is,  we  think,  sustained  by  the  evidence,  although  stoutly  denied 
by  the  defendants.  There  is  not  only  no  record  of  any  such  meet- 
ings, but  those  who  are  said  to  have  been  directors  during  the 
period  all  deny  attending  any  such  meetings  or  transacting  any 
such  business,  and  the  defendants  themselves  are  wholly  unable 
to  name  a  single  director  who  was  present  at  any  such  meeting. 
While  the  absence  of  a  record  of  proceedings,  due  to  the  negli- 
gence of  the  secretary,  would  not  defeat  the  action  of  the  direct- 
ors, we  are  satisfied  no  such  meetings  were  held,  and  that  the  al- 
leged want  of  authority  in  respect  to  many  matters  transacted 
by  the  defendants,  or  one  of  them,  and  Harvey,  was  not  supplied 
at  any  of  the  stockholders'  meetings,  and,  unless  ratified  subse- 
quently, they  were  without  requisite  authority.  During  a  period 
of  about  five  years  the  regularly  chosen  directors  of  the  corpora- 
tion wholly  abdicated  their  functions  as  such,  and  gave  no  atten- 
tion whatever  to  their  duties,  and  left  everything  connected  with 
the  affairs  of  the  corporation  to  the  management  of  the  president, 
secretary,  and  treasurer,  by  virtue  of  their  several  offices,  and, 
beyond  this,  to  take  their  own  unheeded  course.     At  the  annual 


NORTH    HUDSON    MUTUAL   HLDG.   &    IJ3AN    ASSN.   V.    CHILDS.         339 

meetings  of  stockholders,  ofificers  and  directors  were  regularly 
elected,  and  reports  were  made  by  the  secretary  and  treasurer, 
but  the  directors  elected  utterly  neglected  their  duties  as  before. 
The  death  of  Harvey  caused  investigation,  when  the  entire  ab- 
sence of  proper  entries  on  the  ledger  and  record  during  all  this 
period  was  discovered,  as  well  as  the  fact  that  there  was  a  short- 
age in  the  funds  of  the  corporation.  The  defendants  during  all 
this  time  had  proceeded  to  discharge  the  duties  of  their  respective 
offices,  and  looked  after  and  conducted  the  afifairs  of  the  corpora- 
tion in  connection  with  Harvey,  the  secretary,  in  entire  good  faith, 
not  deriving  any  improper  personal  gain  or  profit,  and  without 
improperly  appropriating  to  themselves  any  of  its  property  or 
funds.  They  may  have  made  mistakes  and  misjudged  as  to  their 
powers  and  duties.  They  were  not  guilty  of  intentional  wrong. 
The  defendant  Denniston,  the  treasurer,  whose  functions  were 
purely  ministerial,  and  extended  only  to  receiving  the  moneys  of 
the  plaintiff  and  paying  them  out,  and  to  the  safe-keeping  of  its 
securities,  and  keeping  a  correct  account,  has  accounted  for  and 
paid  over  every  cent  he  received,  and  yet  he  was  charged  by  the 
circuit  court  with  losses  of  the  corporation  by  the  judgment  in 
this  case  to  the  amount  of  over  $21,000.  We  are  unable  to  see 
how  the  defendants  are  to  be  thus  charged  as  ex  officio  members 
of  the  board.  They  were  not  technically  directors,  and  neither  of 
them  had  it  in  his  power  to  call  a  meeting  of  the  board.  They 
could  act  as  ex  officio  members  only  at  a  meeting  regularly  con- 
vened, and  no  meetings  were  held.  Directors  cannot  act  in  any 
other  manner.  Cook,  Corp.  §  592,  and  cases  in  note.  This  is  so 
well  settled  that  citations  of  authority  w^ould  be  superfluous. 
Stated  monthly  meetings  of  the  board  were  required  to  be  held 
on  the  next  Tuesday  after  the  monthly  stockholders'  meetings, 
but  the  directors  came  not.  Special  meetings  might  be  called  on 
the  written  request  of  two  directors,  but  no  such  request  appears 
to  have  been  made,  and  none  are  willing  to  own,  now  that  mis- 
fortune has  overtaken  the  company,  that  he  ever  acted  as  a  di- 
rector during  the  period  in  question.  All  have  been  eager  to  take 
the  benefits,  whatever  they  were,  of  the  management  of  the  de- 
fendants, and  accept  their  share  of  the  money  disbursed  in  paying 
off  the  first  series  of  stock  at  a  figure  amounting  to  nearly  $8,000 
more  than  was  due  on  it,  as  it  is  now  claimed.  None  but  the 
president,  treasurer,  and  secretary  appear  to  have  been  willing  to 
give  the  afifairs  of  the  corporation  any  particular  attention.  And 
at  least  five  of  the  directors  are  understood  to  have  received,  and 
still  hold,  their  shares  of  this  amount,  and  now  all  appear  to  be 
demanding  that  these  defendants  shall  put  back  that  amount  of 
money  from  their  own  funds  into  the  treasury  of  the  plaintiff  to 
make  good  the  alleged  loss  on  this  and  other  accounts,  arising 
out  of  their  attempt  to  manage  the  affairs  of  the  plaintiff  without 
the  aid  or  authority  of  the  board  of  directors.  Such  a  claim, 
when   well    founded   in   law,   ought  to  be   established   by   entirely 


340      DIRECTORS,    OFFICERS    AND    AGENTS MANAGEMENT,    ETC. 

satisfactory  evidence.  Regarding  the  case  now  presented  by  the 
record  as  one  where  a  recovery  must  depend  upon  the  HabiHty  of 
the  defendants  disconnected  with  their  ex  officio  membership  of 
the  board,  it  is  plain  that  Childs  and  Denniston,  in  their  respec- 
tive capacities  as  president  and  treasurer,  are  not  responsible  for 
the  nonfeasance,  negligence,  or  misfeasance  of  Harvey,  as  secre- 
tary; nor  is  either  of  these  liable  for  the  nonfeasance,  negligence, 
or  misfeasance  of  the  other  in  his  official  relations  to  the  plaintiff. 
Their  liability  is  several  and  separate.  They  cannot  be  held 
jointly  liable  for  any  act  in  excess  of  the  authority  of  either,  or 
both  of  them,  without  proof  of  joint  participation,  to  be  proved 
in  each  instance,  and  not  presumed ;  and  here  we  have  neither 
finding  nor  proof  of  improper  combination  or  intentional  wrong. 
If  Childs  and  Harvey,  as  president  and  secretary,  exceeded  their 
powers  in  any  given  instance  to  the  loss  or  damage  of  the  plain- 
tiff, Denniston  is  not  chargeable  with  it,  without  proof  that  he 
intermeddled  with  it  and  in  excess  of  his  authority.  If  Denniston 
and  Harvey,  as  treasurer  and  secretary,  exceeded  their  powers  in 
any  case  to  the  loss  or  damage  of  the  plaintiff,  Childs  is  not  liable 
without  proof  that  he  intermeddled  or  participated  in  the  wrong. 
While  these  rules  are  obviously  correct,  and  so  clearly  so  that 
citation  of  authority  is  not  needed  to  vindicate  them,  in  view  of 
the  finding  and  the  evidence  upon  which  it  was  based  we  have 
felt  it  proper  to  state  them  at  length,  and  with  some  particular- 
ity, as  bearing  upon  the  correctness  of  the  judgment  of  the  cir- 
cuit court.     *     *     * 

5.  The  extent  of  loss  or  damages  the  plaintiff  had  sustained 
formed  a  very  important  part  of  the  controversy,  and  upon  this 
branch  of  the  case  we  regret  to  say  that  we  are  without  the  as- 
sistance and  benefit  of  an  examination  and  determination  of  the 
circuit  court.  As  early  as  September,  1887,  the  plaintiff  employed 
a  Mr.  Somers,  of  St.  Paul,  as  an  expert  accountant,  who  had  had 
considerable  experience  in  the  management  of  the  affairs  of  build- 
ing associations,  to  examine  the  books  and  papers  of  the  plain- 
tiff, ascertain  its  financial  condition,  the  extent  of  its  losses,  and 
how  they  had  been  occasioned.  His  examination  extended  from 
February,  1882,  to  September,  1887.  He  made  a  report  upon 
these  matters,  which  was  put  in  evidence  on  the  trial,  or  the  sub- 
stance of  it,  and  this  report,  with  a  set  of  books  compiled  by  him, 
and  his  testimony,  constitute  almost  the  entire  basis  on  which 
the  finding  against  the  defendants  for  $21,407.05  rests.  This  re- 
port was  adopted  as  an  entirety  by  the  circuit  court,  and  the 
question  of  the  extent  of  loss  or  damages,  as  well  as  legal  ques- 
tions in  respect  to  liability,  were,  in  effect,  determined  by  the 
hired  expert  of  the  plaintiff,  instead  of  the  court;  and  we  have 
been  urged  to  accept  it  here  in  like  manner  as  final  and  conclu- 
sive. If  we  were  willing  to  do  so,  and  should  accordingly  affirm 
this  judgment,  it  would  transpire  that  the  plaintiff's  expert  had 
practically  decided  this  important  cause  in  both  courts  on  several 


NORTH    HUDSON    MUTUAL  BLDG.   &   LOAN   ASSN.   V.   CHILDS.         34I 

vital  and  important  questions  of  law  as  well  as  fact.  We  cannot 
suppose  that  the  circuit  court,  if  it  had  examined  the  report, 
would  have  rendered  the  judgment  found  in  the  record.  It  was 
not  the  duty  of  the  defendant  Denniston,  as  treasurer,  to  collect 
the  first  five  items  in  the  foregoing  statement,  amounting  to 
nearly  $3,000;  nor  was  it  the  duty  of  Childs,  as  president,  so  far 
as  we  are  able  to  understand  it.  The  treasurer  is  only  "to  re- 
ceive all  moneys  as  soon  as  paid  into  the  association."  The  sec- 
retary has  custody  of  the  accounts,  books,  and  papers  of  the 
corporation,  except  deeds,  bonds,  mortgages,  etc.,  kept  by  the 
treasurer,  and  is,  it  would  seem,  the  executive  manager  of  the 
financial  business  of  the  corporation.  The  testimony  to  show 
that  any  loss  had  been  actually  sustained  while  these  defendants 
were  in  office  is  too  vague  and  uncertain  to  justify  the  rendition 
of  a  judgment  for  these  amounts.  Mere  proof  of  failure  to  col- 
lect these  items  is  far  from  showing  that  they  were  lost.  Be- 
sides, as  to  many  of  them,  their  collection  might  have  been  en- 
forced by  forfeiture  and  sale  of  the  stock.  These  defendants  did 
not  possess  that  power.  It  was  lodged  with  the  board  of  direct- 
ors, and  in  some  instances  at  least  the  security  for  loans  is  se- 
curity for  fines,  dues  and  interest.  The  collection  of  these  items 
was  a  part  of  the  business  of  the  corporation  in  charge  of  its 
board  of  directors,  and  they  might  devolve  it  on  the  secretary,  if 
it  was  not  one  of  the  duties  of  his  office,  as  we  understand  it 
was.  It  is  quite  as  consistent  with  the  evidence  that  these  losses, 
if  such  there  were,  occurred  after  the  defendants  resigned  as 
before. 

There  is  nothing  in  the  by-laws  nor  in  the  evidence  to  show 
that  it  was  the  duty  of  the  treasurer  to  do  anything  in  relation 
to  issuing  stock  beyond  caring  for  the  money  paid  for  it  after  it 
was  "paid  into  the  association,"  His  duties  were  purely  minis- 
terial, and  he  had  nothing  to  do,  as  treasurer,  with  determining 
or  computing  the  amount  to  be  paid  on  the  issue  of  stock,  nor  is 
there  any  testimony  showing  or  tending  to  show  that  he  ever  as- 
sumed to  interfere  with  any  such  matter.  It  was  error,  therefore, 
to  include  in  a  judgment  against  him  the  sum  of  $112.06  for 
losses  on  shares  issued  for  too  little  money.  Nor  is  there,  so  far 
as  we  can  discover,  any  proof  tending  to  show  that  this  loss  was 
the  fault  of  the  president,  whose  duty  it  is  to  sign  stock  certifi- 
cates. 

There  is  embraced  in  the  judgment  items  to  the  amount  of 
about  $6,800  for  losses  by  cancellation  of  loans  on  the  ground  that 
there  was  not  money  enough  paid  on  them  to  satisfy  them.  These 
items  appear,  from  Mr.  Somers'  testimony,  to  have  been  arrived 
at  by  ascertaining  the  amount  of  securities  canceled  each  year 
during  the  period  in  question,  and  by  deducting  therefrom  the 
amount  that  "appears  to  have  been  paid  on  that  account  as  per 
secretary's  report,"  and  the  difference  is  charged  up  as  a  loss 
for  which  the  defendants  are  held  liable.     The  secretary's  report 


342      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,    ETC. 

is  not  competent  evidence  against  these  defendants  to  charge 
them  with  this  supposed  loss.  It  is  not  evidence  that  no  more 
was  paid  to  him  than  he  reported.  Which  of  these  defendants,  if 
either,  attended  to  the  matter  of  settHng  up  the  loans  upon  which 
the  alleged  losses  occurred,  we  are  unable  to  ascertain  from  the 
evidence;  and  if  in  some  cases  Denniston  did,  and  in  others 
Childs,  we  have  no  data  upon  which  to  ascertain  the  amount  for 
which  either  ought  to  be  charged.  An  exhibit  annexed  to  the  bill 
of  exceptions  would  seem  to  show  that  in  some  instances  releases 
of  mortgage  loans  were  executed  and  acknowledged  by  Childs  as 
president,  and  in  some  cases  by  Denniston  as  treasurer,  but  in  all 
cases  by  Harvey  as  secretary.  If  loss  occurred  as  charged,  the 
evidence  is  not  sufficient  to  show  it,  much  less  to  show  what  sum 
should  be  charged  to  Childs,  and  what  to  Denniston.  It  seems 
to  have  been  assumed  throughout  that,  if  either  Childs,  Harvey 
or  Denniston  exceeded  his  authority  as  an  officer,  and  loss  ensued, 
the  other  two  would  necessarily  be  liable  for  it  by  reason  of  the 
assumption  by  the  one  of  authority  lodged  only  in  the  board  of 
directors.  Each  of  these  parties,  in  the  absence  of  participation 
of  one  or  both  the  others,  would  alone  be  liable  for  exceeding 
his  authority. 

The  testimony  as  to  items  amounting  to  $3,500,  or  thereabouts, 
for  losses  by  reason  of  money  having  been  paid  for  cancellation 
of  stock  in  excess  of  its  value  seems  to  rest  upon  some  method 
of  ascertaining  its  supposed  value  adopted  by  Somers,  which  we 
do  not  fully  understand;  and  the  same  is  true  as  to  cancellation 
of  loans.  He  seems  to  have  adopted  some  rule  differing  from 
the  by-law  of  the  company  on  that  subject.  He  testified  that  the 
different  parts  of  the  rule,  which  is  quite  obscure,  "don't  hang 
together."  But,  in  view  of  the  result  at  which  we  have  arrived, 
it  is  not  necessary  to  carefully  examine  this  matter. 

6.  Stock  was  issued  by  the  corporation  in  five  series:  First 
series,  March  28,  1877,  500  shares;  second  series,  March,  1879, 
172  shares;  third  series,  March,  1880,  '](>  shares;  fourth  series, 
March,  1883,  116  shares;  and  fifth  series,  February,  1886,  125 
shares.  It  was  generally  supposed  that  the  first  series  had  ma- 
tured so  as  to  be  payable  at  twice  its  nominal  value  in  Septem- 
ber, 1885,  and  the  officers,  Childs,  Denniston  and  Harvey,  pro- 
ceeded to  make  quite  a  large  loan  of  the  First  National  Bank  of 
Hudson  to  raise  money  to  pay  off  that  series  accordingly,^  and 
pledged  to  the  bank  a  large  amount  of  the  plaintiff's  securities; 
the  defendant  Denniston  indorsing  the  note  given  for  the  loan. 
There  was  a  general  understanding  that  the  first  series  was  to  be 
paid  off,  and  the  stockholders  were  anxious  and  ready  to  receive 
their  money.  Payments  were  accordingly  made  by  the  treasurer 
on  orders  drawn  by  Harvey,  as  secretary,  and  signed  by  Childs, 
from  time  to  time,  until  Harvey's  death  in  March,  1887,  no  one 
making  any  objections,  or  supposing,  so  far  as  the  evidence  shows, 
that  there  was  any  apprehension  of  any  shortage  in  the  funds  of 


NORTH    lllDSON    MUTUAL   RLDC.    &    LOAN    ASSN.    V.    GUILDS.  343 

the  corporation,  or  any  irregularity  in  the  management  of  its 
affairs.  The  defendants,  up  to  this  time,  supposed  Harvey  had 
kept  the  books  and  records  properly.  Investigation  ensued,  and 
suit  was  brought  against  the  bank  by  the  plaintiff  to  recover  its 
securities  pledged  for  the  loan.  In  the  meantime  a  board  of 
directors  and  other  officers  had  been  chosen,  and  the  corporation 
had  been  rehabilitated  and  restored  to  its  normal  action,  and 
payments  had  been  ordered  to  be  made,  and  were  in  fact  paid,  on 
this  loan.  The  plaintiff  was  unsuccessful  in  its  suit  against  the 
bank,  and  it  finally  paid  the  loan.  The  new  board  had  voted  to 
pay  six  per  cent,  interest  in  May,  1887,  on  all  unpaid  claims  un- 
der the  first  series  of  stock,  and  directed  the  issue  of  orders  to 
pay  some  of  the  claimants  under  this  series,  on  the  basis  that  it 
had  matured  in  September,  1885,  and  as  late  as  January  11,  1888, 
two  orders  were  directed  to  be  issued  for  the  payment  of  some 
shares  on  the  same  basis.  The  question  had  been  mooted  in  the 
previous  summer  and  fall  whether  the  first  series  had  matured, 
and  whether  the  shortage  in  the  funds  was  not  caused  by  paying 
off  that  series  at  much  more  than  its  actual  value.  The  result 
was  that  as  early,  probably,  as  September,  1887,  and  soon  as 
Somers  had  made  his  report,  the  plaintiff  set  up  the  daim  that  at 
the  time  the  first  series  of  stock  was  paid  off  it  was  in  fact  worth 
only  $1.49,  instead  of  $2,  as  had  been  supposed,  basing  the  claim 
on  such  report.  The  item  included  in  the  judgment  on  this  ac- 
count is  a  large  one,  and  is  sustained  only  by  the  report  or  opin- 
ion of  Mr.  Somers,  and  the  argument  made  upon  the  data  fur- 
nished by  his  report  and  the  evidence  tends  strongly  to  show  that 
tlie  stock  was  worth  much  more  than  the  estimate  made  by  him. 
The  accuracy  and  justice  of  his  report  as  a  basis  of  judicial  action 
against  these  defendants  have  been  found  so  seriously  at  fault, 
and  as  thev  were  not  made  the  subject  of  judicial  examination 
and  consideration  in  the  circuit  court,  as  it  ought  to  have  been, 
we  cannot  accept  and  act  on  his  conclusions  in  respect  to  the 
claim  that  the  first  series  of  stock  was  worth  only  $1.49  when 
paid  off.  It  is  not  within  our  province  or  duty  to  enter  upon  this 
inquiry  until  it  has  been  examined  and  passed  on  by  the  circuit 
court. 

We  think  that,  inasmuch  as  the  action  was  treated  as  a  legal, 
and  not  an  equitable,  one,  by  the  circuit  court,  and  as  the  cor- 
rectness of  the  report  or  statement  of  the  expert,  Somers,  was 
not  judicially  investigated  and  passed  on,  there  was  practically  a 
mistrial  of  the  action,  and  that  the  judgment  should  be  reversed 
on  that  ground,  if  for  no  other  reason.  "A  trial  is  the  judicial 
examination  of  the  issues  between  the  parties."  Rev.  St.  §  2842. 
As  the  judgment  of  the  circuit  court  must  be  reversed  for 
the  errors  already  noticed,  we  think  it  is  but  justice  to  both 
parties  to  order  a  new  trial,  and  to  direct  that  the  cause  be 
referred  upon  all  the  issues  therein,  upon  the  proofs  already 
taken  and  such  as  may  be  produced  hereafter,  to  some  attorney 


344      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,    ETC. 

being  a  competent  accountant,  to  report  special  findings  upon  all 
the  issues,  and  to  take  and  state  an  account  of  the  transactions 
in  question,  and  report  the  same  to  the  court,  to  the  end  that  such 
judgment  may  be  rendered  thereon  as  shall  be  just  and  proper. 
The  action  must  be  regarded  as  an  equitable  one,  and  other  nec- 
essary or  proper  parties  may  be  brought  in,  if  it  be  deemed 
necessary  by  the  plaintiff  or  by  the  court,  in  order  to  secure  a 
just  and  proper  determination  of  the  entire  controversy.  If  it 
shall  be  thought  proper  to  amend  the  pleadings  so  as  to  charge 
these  defendants  in  equity  as  ex-officio  members  of  the  board  of 
directors,  it  may  be  that  all  the  directors  during  the  period  in 
question  will  be  necessary  parties  (Sherman  v.  Parish,  53  N.  Y. 
483),  on  the  ground  that  the  defendants,  if  chargeable  as  such, 
are  entitled  to  have  contribution  of  and  from  such  directors. 
(Nickerson  v.  Wheeler,  118  Mass.  295;  Baynard  v.  Woolley,  20 
Beav.  584  ;  Ashhurst  v.  Mason,  L.  R.,  20  Eq.  225,  236.)  There 
are  authorities  which  take  a  contrary  view,  and,  as  these  ques- 
tions, thus  suggested,  were  not  argued  at  the  hearing,  we  do  not 
express  any  opinion  in  respect  to  them.  The  question  whether 
the  corporation  plaintiff  has  not  so  far  taken  and  enjoyed  the 
benefits  of  the  transactions  complained  of,  and  ratified  them,  that 
it  has  lost  the  right  to  complain  of  them,  was  ably  and  vigor- 
ously pressed  upon  our  attention,  but  we  express  no  opinion  on 
this  point,  as  additional  evidence  may  be  produced  materially 
affecting  the  rights  of  the  parties  in  respect  to  it.  The  judgment 
of  the  circuit  court  is  reversed,  and  the  cause  is  remanded  for  a 
new  trial,  and  for  further  proceeding  in  accordance  with  the 
opinion  of  this  court.^ 


HUN  V.  GARY. 

1880.     82  N.  Y.  65,  59  How.  Prac.  439,  37  Am.  Rep.  546. 

Directors'  Duty   of  Diligence  and  Prudence. 

EARL,  J. — This  action  was  brought  by  the  receiver  of  the  Cen- 
tral Savings  Bank  of  the  city  of  New  York  against  the  defend- 
ants, who  were  trustees  of  the  bank,  to  recover  damages  which, 
it  is  alleged,  they  caused  the  bank  by  their  misconduct  as  such 
trustees. 

The  first  question  to  be  considered  is  the  measure  of  fidelity, 
care  and  diligence  which  such  trustees  owe  to  such  a  bank  and 
its  depositors.  The  relation  existing  between  the  corporation  and 
its  trustees  is  mainly  that  of  principal  and  agent,  and  the  relation 
between  the  trustees  and  the  depositors  is  similar  to  that  of  trus- 
tee and  cestui  que  trust.     The  trustees  are  bound  to  observe  the 

*Sce,  BrigRs  v.  Spalding.  141  U.  S.  132.  35  L.  ed.  662,  11  Sup.  Ct.  924; 
Childs  V.  White,  158  App.  Div.  (N.  Y.)  1,  142  N.  Y.  S.  732  (1913).— Ed. 


HUN   V.    GARY.  345 

limits  placed  upon  their  powers  in  the  charter,  and  if  they  tran- 
scend such  Hmits  and  cause  damage,  they  incur  Hability.  If  they 
act  fraudulently  or  do  a  wilful  wrong,  it  is  not  doubted  that  they 
may  be  held  for  all  the  damage  they  cause  to  the  bank  of  its 
depositors.  But  if  they  act  in  good  faith  within  the  limits  of 
powers  conferred,  using  proper  prudence  and  diligence,  they  are 
not  responsible  for  mere  mistakes  or  errors  of  judgment.  That 
the  trustees  of  such  corporations  are  bound  to  use  some  diligence 
in  the  discharge  of  their  duties  cannot  be  disputed.  All  the 
authorities  hold  so.  What  degree  of  care  and  diligence  are  they 
bound  to  exercise?  Not  the  highest  degree,  but  such  as  a  very 
vigilant  or  extremely  careful  person  would  exercise.  If  such 
were  required,  it  would  be  difficult  to  find  trustees  who  would 
incur  the  responsibility  of  such  trust  positions.  It  would  not  be 
proper  to  answer  the  question  saying  the  lowest  degree.  Few 
persons  would  be  willing  to  deposit  money  in  savings  banks,  or 
to  take  stock  in  corporations,  with  the  understanding  that  the 
trustees  or  directors  were  bound  only  to  exercise  slight  care,  such 
as  inattentive  persons  would  give  to  their  own  business,  in  the 
management  of  the  large  and  important  interests  committed  to 
their  hands.  When  one  deposits  money  in  a  savings  bank,  or 
takes  stock  in  a  corporation,  thus  divesting  himself  of  the  imme- 
diate control  of  his  property,  he  expects,  and  has  the  right  to 
expect,  that  the  trustees  or  directors,  who  are  chosen  to  take  his 
place  in  the  management  and  control  of  his  property,  will  exer- 
cise ordinary  care  and  prudence  in  the  trusts  committed  to  them 
— the  same  degree  of  care  and  prudence  that  men  prompted  by 
self-interest  generally  exercise  in  their  own  affairs.  When  one 
voluntarily  takes  the  position  of  trustee  or  director  of  a  corpora- 
tion, good  faith,  exact  justice,  and  public  policy  unite  in  requiring 
of  him  such  a  degree  of  care  and  prudence,  and  it  is  a  gross 
breach   of  duty — crassa  negligentia — not  to  bestow  them. 

It  is  impossible  to  give  the  measure  of  culpable  negligence  for 
all  cases,  as  the  degree  of  care  required  depends  upon  the  subject 
to  which  it  is  to  be  applied.  (First  Nat.  Bank  v.  Ocean  Nat. 
Bank,  60  N.  Y.  278.)  What  would  be  slight  neglect  in  the  care 
of  a  quantity  of  iron  might  be  gross  neglect  in  the  care  of  a 
jewel.  What  would  be  slight  neglect  in  the  care  exercised  in  the 
affairs  of  a  turnpike  corporation,  or  even  of  a  manufacturing  cor- 
poration, might  be  gross  neglect  in  the  care  exercised  in  the  man- 
agement of  a  savings  bank  intrusted  with  the  savings  of  a  multi- 
tude of  poor  people,  depending  for  its  life  upon  credit  and  liable 
to  be  wrecked  by  the  breath  of  suspicion.  There  is  a  classifica- 
tion of  negligence  to  be  found  in  the  books,  not  always  of  prac- 
tical value  and  yet  sometimes  serviceable,  into  slight  negligence, 
gross  negligence,  and  that  degree  of  negligence  intermediate  the 
two,  attributed  to  the  absence  of  ordinary  care;  and  the  claim 
on  behalf  of  these  trustees  is  that  they  can  only  be  held  responsi- 
ble in  this  action  in  consequence  of  gross   negligence,   according 


346      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,     ETC. 

to  this  classification.     If  gross   negligence  be  taken  according  to 
its  ordinary  meaning — as  something  nearly  approaching  fraud  or 
bad  faith — I  cannot  yield  to  this  claim;  and  if  there  are  any  au- 
thorities upholding  the  claim,  I  emphatically  dissent   from  them. 
It  seems   to  me  that  it  would  be  a  monstrous   proposition   to 
hold  that  trustees,  intrusted  with  the  management  of  the  property, 
interests  and  business  of  other  people,  who  divest  themselves  of 
the   management   and   confide   in   them,   are   bound   to   give   only 
slight  care  to  the  duties  of  their  trust,  and  are  liable  only  in  case 
of  gross  inattention  and  negligence;  and  I  have  found  no  author- 
ity fully  holding  such  a  proposition.     It  is  true  that  authorities 
are  found  which  hold  that  trustees  are  liable  only  for  crassa  neg- 
ligentia,  which  literally  means  gross  negligence;  but  that  phrase 
has  been  defined  to  mean  the  absence  of  ordinary  care  and  dili- 
gence adequate  to  the  particular  case.     In  Scott  v.  De  Peyster  (i 
Edw.  Ch.  513,  543) — a  case  most  cited — the  learned  Vice  Chan- 
cellor said:     "I  think  the  question  in  all  such  cases  should  and 
must  necessarily  be,  whether  they   (directors)    have  omitted  that 
care  which  men  of  common  prudence  take  of  their  own  concerns. 
To  require  more  would  be  adopting  too  rigid  a  rule  and  render- 
ing them  liable  for  slight  neglect;  while  to  require  less  would  be 
relaxing  too  much  the  obligation  which  binds  them  to  vigilance 
and  attention  in  regard  to  the  interests  of  those  confided  to  their 
care,  and  expose  them  to  liability  for  gross  neglect  only — which 
is   very  little   short   of   fraud   itself."      In    Spering's    Appeal    (71 
Penn.    St.    11),  Judge   Sharswood   said:      "They    (directors)    can 
only  be  regarded  as  mandataries — persons  who  have  gratuitously 
undertaken   to   perform   certain    duties,   and   who   are,   therefore, 
bound  to  apply  ordinary  skill  and  diligence,  but  no  more."     In 
Hodges  V.  New  England  Screw  Co.    (i  R.  L.  312),  Jenckes,  J., 
said:     "The  sole  question  is  whether  the  directors  have  or  have 
not  bestowed  proper  diligence.     They  are  liable  only  for  ordinary 
care;  such  care  as  prudent  men  take  in  their  own  afifairs."     And 
in  the  same  case,  Ames,  J.,  said:     "They  should  not,  therefore, 
be  liable   for  innocent  mistakes,  unintentional   negligence,   honest 
errors   of   judgment,   but   only   for   wilful    fraud   or   neglect,   and 
want   of   ordinary   knowledge   and   care."     The   same   case   came 
again  under  consideration  in  3  R.  I.  9,  and  Green,  Ch.  J.,   said: 
"We  think  a  board  of  directors,  acting  in  good  faith  and  with 
reasonable  care  and  diligence,  who  nevertheless   fall  into  a  mis- 
take, either  as  to  law  or  fact,  are  not  liable  for  the  consequences 
of  such  mistake."    In  the  case  of  The  Liquidators  of  the  Western 
Bank  v.  Douglas   (11   Session  Cases    [3d  series],   112    [Scotch]), 
it  is  said:     "Whatever  the  duties    (of  directors)    are,  they  must 
be  discharged  with  fidelity  and  conscience,  and  with  ordinary  and 
reasonable  care.     It  is  not  necessary  that  I  should  attempt  to  de- 
fine where  excusable  remissness  ends  and  gross  negligence  begins. 
That  must  depend  to  a  large  extent  on  the  circumstances.     It  is 
enough  to  say  that  gross  negligence  in  the  performance  of  such 


HUN    V.    GARY.  347 

a  duty,  the  want  of  reasonable  and  ordinary  fidelity  and  care,  will 
impose  liability  for  loss  thereby  occasioned."  In  The  Charitable 
Corporation  v.  Sutton  (2  Atkyns,  405),  Lord  Chancellor  Hard- 
wicke  said,  that  a  person  who  accepted  the  office  of  director  of  a 
corporation  "is  obliged  to  execute  it  with  fidelity  and  reasonable 
diligence,"  although  he  acts  without  compensation.  In  Litchfield 
V.  White  (3  Sandf.  545),  Sandford,  J.,  said:  "In  general,  a 
trustee  is  bound  to  manage  and  employ  the  trust  property  for  the 
benefit  of  the  cestui  que  trust  with  the  care  and  diligence  of  a 
provident  owner.  Consequently  he  is  liable  for  every  loss  sus- 
tained by  reason  of  his  negligence,  want  of  caution,  or  mistake, 
as  well  as  positive  misconduct." 

In  Spering's  Appeal,  Judge  Sharswood  said  that  directors  "are 
not  liable  for  mistakes  of  judgment,  even  though  they  may  be  so 
gross  as  to  appear  to  us  absurd  and  ridiculous,  provided  they  were 
honest,  and  provided  they  are  fairly  within  the  scope  of  the  pow- 
ers and  discretion  confided  to  the  managing  body."  As  I  under- 
stand this  language,  I  cannot  assent  to  it  as  properly  defining  to 
any  extent  the  nature  of  a  director's  responsibility.  Like  a  man- 
datary, to  whom  he  has  been  likened,  he  is  bound  not  only  to 
exercise  proper  care  and  diligence,  but  ordinary  skill  and  judg- 
ment. As  he  is  bound  to  exercise  ordinary  skill  and  judgment,  he 
cannot  set  up  that  he  did  not  possess  them.  When  damage  is 
caused  by  his  want  of  judgment,  he  cannot  excuse  himself  by 
alleging  his  gross  ignorance.  One  who  voluntarily  takes  the  posi- 
tion of  director,  and  invites  confidence  in  that  relation,  under- 
takes, like  a  mandatary,  with  those  whom  he  represents  or  for 
whom  he  acts,  that  he  possesses  at  least  ordinary  knowledge  and 
skill,  and  that  he  will  bring  them  to  bear  in  the  discharge  of  his 
duties.  (Story  on  Bailments,  §  182.)  Such  is  the  rule  applicable 
to  public  officers,  to  professional  men  and  to  mechanics,  and  such 
is  the  rule  which  must  be  applicable  to  every  person  who  under- 
takes to  act  for  another  in  a  situation  or  employment  requiring 
skill  and  knowledge  and  it  matters  not  that  the  service  is  to  be 
rendered  gratuitously.  These  defendants  voluntarily  took  the 
position  of  trustees  of  the  bank.  They  invited  depositors  to  con- 
fide to  them  their  savings,  and  to  intrust  the  safe-keeping  and 
management  of  them  to  their  skill  and  prudence.  They  under- 
took not  only  that  they  would  discharge  their  duties  with  proper 
care,  but  that  they  would  exercise  the  ordinary  skill  and  judg- 
ment requisite  for  the  discharge  of  their  delicate  trust. 

Enough  has  now  been  said  to  show  what  measure  of  diligence, 
skill  and  prudence  the  law  exacts  from  managers  and  directors  of 
corporations;  and  we  are  now  prepared  to  examine  the  facts  of 
this  case,  for  the  purpose  of  seeing  if  these  trustees  fell  short  of 
this  measure  in  the  matters  alleged  in  the  complaint. 

This  bank  was  incorporated  by  the  act,  chapter  467,  of  the 
Laws  of  1867.  and  it  commenced  business  in  the  spring  of  that 
year,  in  a  hired  building,  on  the  east  side  of  Third  avenue,  in  the 


348      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,     ETC. 

city   of   New   York.      It   remained   there    for   several   years,    and 
then  removed  to  the  west  side  of  the  avenue,  between  Forty-fifth 
and  Forty-sixth  streets,  where  it  occupied  hired  rooms  until  near 
the  time  of  its  failure  in  the  fall  of  1875.    During  the  whole  time 
the  deposits  averaged  only  about  $70,000.     In   1867, _  the  income 
of  the  bank  was  $942.12,   and  the  expenses,  including  amounts 
paid  for  safe,  fixtures,  charter,  current  expenses  and  interest  to 
depositors,  were  $5,571.34.     In   1868,  the  income  was  $5,471.43, 
and  the  expenses,  including  interest  to  depositors,  $5,719.43.     In 
1869,  the  income  was  $3,918.27,  and  the  expense  and  interest  paid 
$5,346.05.     In  1870,  the  income  was  $5,784.09,  and  expenses  and 
interest  $7,040.22.     In    1871,   the  income  was   $13,551.14,   which 
included   a  bonus   of  $4,000,   or  $6,000  obtained   upon   the   pur- 
chase of  a  mortgage  of  $40,000,  which  mortgage  was  again  sold 
in   1874  at  a  discount  of  $2,000,  and  the  expenses,  including  in- 
terest paid,  were  $9,124.05.     In  1872  the  income  was  $5,100.51, 
and  the  expenses,  including  interest  paid,  were  $7,212.49.     Down 
to  the   1st  day  of  January,    1873,  therefore,  the  total   expenses, 
including  interest  paid,  were  $5,046  more  than  the  income.     To 
this   sum  should  be   added   $2,000  deducted   on  the   sale   of   the 
large  mortgage  in   1874,  which  was  purchased  at  the  large  dis- 
count in  1871,  as  above  mentioned,  and  yet  entered  in  the  assets 
at  its  face.     From  this  apparent  deficiency  should  be  deducted  the 
value  of  the  safe  and  furniture  of  the  bank,  from  which  the  re- 
ceiver subsequently  realized  $500.     At  the  same  date,  the  amount 
due  to  over  one  thousand  depositors  was  about  $70,000,  and  the 
assets  of  the  bank  consisted  of  about  $13,000  in  cash  and  the 
balance  mostly  of  mortgages  upon  real  estate. 

While  the  bank  was  in  this  condition,  with  a  lease  of  the  rooms 
then  occupied  by  it  expiring  May  i,  1874,  the  project  of  pur- 
chasing a  lot  and  erectmg  a  banking-house  thereon  began  to  be 
talked  of  among  the  trustees.  The  only  reason  put  on  record  in 
the  minutes  of  the  meetings  held  by  the  trustees  for  procuring  a 
new  banking-house  was  to  better  the  financial  condition  of  the 
bank.  In  February,  1873,  at  a  meeting  of  the  trustees,  a  com- 
mittee was  appointed  "on  site  for  new  building;"  and  in  March 
the  committee  entered  into  contract  for  the  purchase  of  a^  plot 
of  land,  consisting  of  four  lots,  on  the  corner  of  Forty-eighth 
street  and  Third  avenue,  for  the  sum  of  $74,500.  of  which  $1,000 
was  to  be  paid  down,  $9,000  on  the  first  day  of  May  then  next, 
and  $64,000  to  be  secured  by  a  mortgage,  payable  on  or  before 
May  I,  1875,  with  interest  from  May  i,  1873,  at  seven  per  cent.; 
and  there  was  an  agreement  that  payment  of  the  principal  sum 
secured  by  the  mortgage  might  be  extended  to  May  i,  1877,  pro- 
vided a  building  should,  without  unavoidable  delay,  be  erected 
upon  the  corner  lot,  worth  not  less  than  $25,000.  This  contract 
was  reported  by  the  committee  to  the  trustees,  at  a  meeting  held 
April  7.  On  the  ist  day  of  May,  1873,  the  real  estate  was  con- 
veyed and  the  cash  payment  was  made,  and  four  separate  mort- 


HUN   V.   GARY.  349 

gages  were  executed  to  secure  the  balance,  one  upon  each  lot. 
The  mortgage  upon  the  lot  upon  which  the  bank  building  was 
afterward  erected  was  for  $30,500.  At  the  same  time  the  bank 
became  obligated  to  build  upon  that  lot  a  building  covering  its 
whole  front,  25  feet,  and  60  feet  deep,  and  not  less  than  five 
stories  high,  and  have  the  same  inclosed  by  the  first  day  of  No- 
vember then  next.  Upon  that  lot  the  bank  proceeded,  in  the 
spring  of  1875,  to  erect  a  building  covering  the  whole  front,  and 
jd  feet  deep,  and  five  stories  high,  at  an  expense  of  about  $27,000. 
And  the  building  was  nearly  completed  when  the  receiver  of  the 
bank  was  appointed,  in  November  of  that  year.  The  three  lots 
not  needed  for  the  building  were  disposed  of,  as  we  may  assume, 
without  any  loss,  leaving  the  corner  lot  used  for  the  building  to 
cost  the  bank  $29,250;  and  we  may  assume  that  that  was  the 
fair  value  of  the  lot.  This  case  may  then  be  treated  as  if  these 
trustees  had  purchased  the  corner  lot  at  $29,250,  and  bound 
themselves  to  erect  thereon  a  building  costing  $27,000.  When 
the  receiver  was  appointed,  that  lot  and  building,  and  other  assets 
which  produced  less  than  $1,000,  constituted  the  whole  property 
of  the  bank ;  and  subsequently  the  lot  and  building  were  swept 
away  by  a  mortgage  foreclosure,  and  this  action  was  brought  to 
recover  the  damages  caused  to  the  bank  by  the  alleged  improper 
investment  of  its  funds,  as  above  stated,  in  the  lot  upon  which 
the  building  was  erected. 

At  the  time  of  the  lot,   the  bank  was   substantially  insolvent. 
If  it  had  gone  into  liquidation,  its  assets  would  have  fallen  sev- 
eral thousand  dollars  short  of  discharging  its  liabilities,  and  this 
state  of  things  was  known  to  the  trustees.     It  had  been  in  ex- 
istence about  six  years,  doing  a  losing  business.     The  amount  of 
its   deposits,   which  its  managers  had  not  been  able  to  increase, 
shows   that   the   enterprise  was   an   abortion   from  the  beginning, 
either  because  it  lacked  public  confidence,  or  was  not  needed  in 
the  place  where  it  was  located.     It  had  changed  its  location  once 
without  any  benefit.     It  had  on  hand  about  $13,000  in  cash,  of 
which    $10,000    were    taken    to    make    the    first    payments.      The 
balance  of  its   assets  was   mostly  in  mortgages   not   readily  con- 
vertible.     One    was    a    mortgage    for    $40,000,    which    had    been 
purchased  at  a  large  discount,  and  we  may  infer  that  it  was  not 
very  saleable,  as  the  trustees  resolved  to  sell  it  as  early  as  "May, 
1873,  and  in  August,  1873,  authorized  it  to  be  sold  at  a  discount 
of  not  more  than  $2,500,  and  yet  it  was  not  sold  until  1874.     In 
this  condition  of  things  the  trustees  made  the  purchase  complained 
of,  under  an  obligation  to  place  on  the  lot  an  expensive  banking- 
house.     Whether,  under  the  circumstances,  the  purchase  was  such 
as  the  trustees,   in  the  exercise  of  ordinary  prudence,   skill   and 
care,  could  make;  or  whether  the  act  of  purchase  was  reckless, 
rash,   extravagant,    showing   a   want    of   ordinary   prudence,    skill, 
and  care,  were  questions   for  the  jury.     It  is   not   disputed  that, 
under  the  charter  of  this  bank,  as  amended  in  1868   (chap.  294), 


350      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,     ETC. 

it  had  the  power  to  purchase  a  lot  for  a  banking-house  "requisite 
for  the  transaction  of  its  business."  That  was  a  power,  like  every 
other  possessed  by  the  bank,  to  be  exercised  with  prudence  and 
care.  Situated  as  this  moribund  institution  was,  was  it  a  pru- 
dent and  reasonable  thing  to  do,  to  invest  nearly  half  of  all  the 
trust  funds  in  this  expensive  lot,  with  an  obligation  to  take  most 
of  the  balance  to  erect  thereon  an  extravagant  building?  The 
trustees  were  urged  on  by  no  real  necessity.  They  had  hired 
rooms  vi^here  they  could  have  remained;  or  if  those  rooms  were 
not  adequate  for  their  small  business,  we  may  assume  that  others 
could  have  been  hired.  They  put  forward  the  claim  upon  the 
trial  that  the  rooms  they  then  occupied  were  not  safe.  That  may 
have  been  a  good  reason  for  making  them  more  secure,  or  for 
getting  other  rooms,  but  not  for  the  extravagance  in  which  they 
indulged.  It  is  inferable,  however,  that  the  principal  motive 
which  influenced  the  trustees  to  make  the  change  of  location  was 
to  improve  the  financial  condition  of  the  bank  by  increasing  its 
deposits.  Their  project  was  to  buy  this  corner  lot  and  erect 
thereon  an  imposing  edifice,  to  inspire  confidence,  attract  atten- 
tion, and  thus  draw  deposits.  It  was  intended  as  a  sort  of  ad- 
vertisement of  the  bank,  a  very  expensive  one,  indeed.  Savings 
banks  are  not  organized  as  business  enterprises.  They  have  no 
stockholders,  and  are  not  to  engage  in  speculations  or  money- 
making  in  a  business  sense.  They  are  simply  to  take  the  deposits, 
usually  small,  which  are  oflfered,  aggregate  them,  and  keep  and 
invest  them  safely,  paying  such  interest  to  the  depositors  as  is 
thus  made,  after  deducting  expenses,  and  paying  the  principal 
upon  demand.  It  is  not  legitimate  for  the  trustees  of  such  a  bank 
to  seek  deposits  at  the  expense  of  present  depositors.  It  is  their 
business  to  take  deposits  when  offered.  It  was  not  proper  for 
these  trustees — or  at  least  the  jury  may  have  found  that  it  was 
not — to  take  the  money  then  on  deposit  and  invest  it  in  a  banking- 
house,  merely  for  the  purpose  of  drawing  other  deposits.  In 
making  this  investment,  the  interests  of  the  depositors,  whose 
money  was  taken,  can  scarcely  be  said  to  have  been  consulted. 

It  was  not  that  the  trustees  purchased  this  lot  for  no  more  than 
a  fair  value,  and  that  the  loss  was  occasioned  by  the  subsequent 
general  decline  in  the  value  of  real  estate.  They  had  no  right  to 
expose  their  bank  to  the  hazard  of  such  a  decline.  If  the  pur- 
chase was  an  improper  one  when  made,  it  matters  not  that  the 
loss  came  from  the  unavoidable  fall  in  the  value  of  the  real  estate 
purchased.  The  jury  may  have  found  that  it  was  grossly  care- 
less for  the  trustees  to  lock  up  the  funds  in  their  charge  in  such 
an  investment,  where  they  could  not  be  reached  in  any  emergency 
which  was  likely  to  arise  in  the  affairs  of  the  crippled  bank. 

We  conclude,  therefore,  that  the  evidence  justified  a  finding 
by  the  jury  that  this  was  not  a  case  of  mere  error  or  mistake 
of  judgment  on  the  part  of  the  trustees,  but  that  it  was  a  case 


HUX    V.    GARY.  351 

of  improvidence,  of  reckless,  unreasonable  extravagance,  in  which 
the  trustees  failed  in  that  measure  of  reasonable  prudence,  care 
and  skill  which  the  law   requires. 

This  case  was  moved  for  trial  at  a  Circuit  Court,  and  before 
the  jury  was  impaneled,  the  defendants  claimed  that  the  case  was 
improperly  in  the  circuit,  and  that  it  could  be  tried  at  Special 
Term;  and  the  court  ordered  that  the  trial  proceed,  and  at  the 
close  of  the  evidence,  the  defendants  moved  that  the  complaint 
be  dismissed,  on  the  ground  that  the  action  was  not  a  proper  one 
to  be  tried  before  a  jury,  and  should  be  tried  before  the  equity 
branch  of  the  court.  The  motion  was  denied,  and  these  rulings 
are  now  alleged  for  error.  The  receiver  in  this  case  represents 
the  bank,  and  may  maintain  any  action  the  bank  could  have 
maintained.  The  trustees  may  be  treated  as  agents  of  the  bank. 
(In  re  German  Mining  Co.,  O-j  Eng.  Law  &  Eq.  158;  Belknap 
v.  Davis,  19  Me.  455 ;  Bedford  R.  R.  Co.  v.  Bowser,  48  Penn.  St. 
29 ;  Butts  v.  Wood,  38  Barb.  181 ;  Austen  v.  Daniels,  4  Den.  299 ; 
O.  &  M.  R.  R.  Co.  V.  McPherson,  35  Mo.  13)  ;  and  for  any  mis- 
feasance, or  non-feasance,  causing  damage  to  the  bank,  they  were 
responsible  to  it,  upon  the  same  principal  that  any  agent  is  for 
like  cause  responsible  to  his  principal.  It  has  never  been  doubted 
that  a  principal  may  sue  his  agent  in  an  action  at  law  for  any 
damages  caused  by  culpable  misfeasance  or  non-feasance  in  the 
business  of  the  agency.  The  only  relief  claimed  in  this  com- 
plaint was  a  money  judgment,  and  we  think  it  was  properly  tried 
as  an  action  at  law.  No  equitable  rights  were  to  be  adjusted, 
and  there  was  no  occasion  to  appeal  to  an  equitable   forum. 

Treating  this,  therefore,  as  an  action  at  law,  it  follows  also 
that  the  objection  taken  that  other  trustees  should  have  been 
joined  as  defendants  cannot  prevail.  In  actions  ex  delicto,  the 
plaintiff  may  sue  one,  some  or  all  of  the  wrongdoers.  (Liqui- 
dators of-  the  Western  Bank  v.  Douglas,  22  Session  Cases  [2d 
series],  475    [Scotch]  ;  Barbour  on   Parties.  203.) 

The  defendants  Hoffman  and  Gearty  filed  petitions  for  their 
discharge  in  bankruptcy  after  the  commencement  of  this  action, 
and  were  discharged  before  judgment,  and  they  alleged  such  dis- 
charge as  a  defense  to  the  action.  The  trial  judge  and  the  Gen- 
eral Term  held  that  the  discharge  furnished  no  defense,  and  we 
are  of  the  same  opinion.  This  claim  was  purely  for  unliquidated 
damages  occasioned  by  a  tort.  Such  a  claim  was  not  provable 
in  bankruptcy,  and,  therefore,  was  not  discharged.  (U.  S.  Rev. 
Stat.  [2d  ed.],  §§  5115.  5119,  5067  to  5071;  Zinn  v.  Ritterman. 
2  Abb.  [X.  S.]  261;  Kellogg  v.  Schuyler,  2  Den.  73;  Crouch  v. 
Gridley,  6  Hill,  250;  In  re  Wiggers,  2  Biss.  71;  In  re  Clough,  2 
Ben.  508;  In  re  Sidle,  2  Bank.  Reg.  'j'j.') 

I  conclude,  therefore,  that  the  judgment  appealed  from  should 
be  affirmed. 

The  appeal  by  the  plaintiff  from  the  order  of  the  General  Term, 


352      DIRECTORS,    OFFICERS    AND    AGENTS MANAGEMENT,     ETC. 

granting  a  new  trial   as   to   defendant   Smith,   must,   for   reasons 
stated  on  the  argument,  be  dismissed,  with  costs. 

All  concur. 

Judgment  affirmed  and  appeal   from  order  dismissed. 


TWIN-LICK  OIL  CO.  v.  MARBURY. 

1875.    91  U.  S.  587,  23  L.  ed.  328. 

Directors'  Duty  of  Loyalty — Loan  to  Corporation. 

MR.  JUSTICE   MILLER  delivered  the  opinion  of  the  court. 

The  appellant  here,  complainant  below,  was  a  corporation  or- 
ganized under  the  laws  of  West  Virginia,  engaged  in  the  business 
of  raising  and  selling  petroleum.  It  became  very  much  embar- 
rassed in  the  early  part  of  1867,  and  borrowed^  from  the  defend- 
ant the  sum  of  $2,000,  for  which  a  note  was  given,  secured  by  a 
deed  of  trust,  conveying  all  the  property,  rights,  and  franchises 
of  the  corporation  to  William  Thomas,  to  _  secure  the  payment  of 
said  note,  with  the  usual  power  of  sale  in  default  of  payment. 
The  property  was  sold  under  the  deed  of  trust;  was  bought  in 
by  defendant's  agent  for  his  benefit,  and  conveyed  to  him  in  the 
summer  of  the  same  year.  The  defendant  was,  at  the  time  of 
these  transactions,  a  stockholder  and  director  in  the  company; 
and  the  bill  in  this  case  was  filed  in  April,  1871,  four  years  after, 
to  have  a  decree  that  defendant  holds  as  trustee  for  complainant, 
and  for  an  accounting  as  to  the  time  he  had  control  of  the  prop- 
erty. It  charges  that  defendant  has  abused  his  trust  relation  to 
the  company,  to  take  advantage  of  its  difficulties,  and  buy  in  at  a 
sacrifice  its  valuable  property  and  franchises;  that,  concealing  his 
knowledge  that  the  lease  of  the  ground  on  which  the  company 
operated  included  a  well,  working  profitably,  and  by  promises  to 
individual  shareholders  that  he  would  purchase  in  the  property 
for  the  joint  benefit  of  the  whole,  he  obtained  an  unjust  advan- 
tage, and  in  other  ways  violated  his  duty  as  an  officer  charged 
with  a  fiduciary  relation  to  the  company.  As  to  all  this,  which  is 
denied  in  the  answer,  and  as  to  which  much  testimony  is  taken, 
it  is  sufficient  to  say  that  we  are  satisfied  that  the  defendant 
loaned  the  money  to  the  corporation  in  good  faith,  and  honestly 
to  assist  it  in  its  business  in  an  hour  of  extreme  embarrassment, 
and  took  just  such  security  as  any  other  man  would  have  taken; 
that  when  his  money  became  due,  and  there  was  no  apparent 
probability  of  the  company  paying  it  at  any  time,  the  property 
was  sold  by  the  trustee,  and  bought  in  by  defendant  at  a  fair 
and  open  sale,  and  at  a  reasonable  price;  that,  in  short,  there  was 
neither  actual  fraud  nor  oppression,  no  advantage  was  taken  of 
defendant's  position  as  director,  or  of  any  matter  known  to  him 
at  the  time  of  the  sale,  afifecting  the  value  of  the  property ,_  which 
was  not  as  well  known  to  others  interested  as  it  was  to  himself; 


TWIN-LICK   OIL   CO.    V.    MARBURY.  353 

and  that  the  sale  and  purchase  was  the  only  mode  left  to  defend- 
ant to  make  his  money. 

The  first  question  which  arises  in  this  state  of  the  facts  is, 
whether  defendant's  purchase  was  absolutely  void. 

That  a  director  of  a  joint-stock  corporation  occupies  one  of 
those  fiduciary  relations  where  his  dealings  with  the  subject-matter 
of  his  trust  or  agency,  and  with  the  beneficiary  or  party  whose 
interest  is  confided  to  his  care,  is  viewed  with  jealousy  by  the 
courts,  and  may  be  set  aside  on  slight  grounds,  is  a  doctrine 
founded  on  the  soundest  morality,  and  which  has  received  the 
clearest  recognition  in  this  court  and  in  others.  Koehler  v.  Black 
River  Falls  Iron  Co.,  2  Black,  715;  Drury  v.  Cross,  7  Wall.  299; 
Luxemburg  R.  R.  Co.  v.  Maquay,  25  Beav.  586;  The  Cumberland 
Co.  V.  Sherman,  30  Barb.  553 ;  16  j\Id.  456.  The  general  doctrine, 
however,  in  regard  to  contracts  of  this  class,  is,  not  that  they  are 
absolutely  void,  but  that  they  are  voidable  at  the  election  of  the 
party  whose  interest  has  been  so  represented  by  the  party  claim- 
ing under  it.  We  say,  this  is  the  general  rule :  for  there  may  be 
cases  where  such  contracts  would  be  void  ab  initio ;  as  when  an 
agent  to  sell  buys  of  himself,  and  by  his  power  of  attorney  con- 
veys to  himself  that  which  he  was  authorized  to  sell.  But,  even 
here,  acts  which  amount  to  a  ratification  by  the  principal  may 
validate  the  sale. 

The  present  case  is  not  one  of  that  class.  While  it  is  true  that 
the  defendant,  as  a  director  of  the  corporation,  was  bound  by  all 
those  rules  of  conscientious  fairness  which  courts  of  equity  have 
imposed  as  the  guides  for  dealing  in  such  cases,  it  cannot  be 
maintained  that  any  rule  forbids  one  director  among  several  from 
loaning  money  to  the  corporation  when  the  money  is  needed,  and 
the  transaction  is  open,  and  otherwise  free  from  blame.  No  ad- 
judged case  has  gone  so  far  as  this.  Such  a  doctrine,  while  it 
would  afford  little  protection  to  the  corporation  against  actual 
fraud  or  oppression,  would  deprive  it  of  the  aid  of  those  most 
interested  in  giving  aid  judiciously,  and  best  qualified  to  judge  of 
the  necessity  of  that  aid,  and  of  the  extent  to  which  it  may  safely 
be  given. 

There  are  in  such  a  transaction  three  distinct  parties  whose  in- 
terest is  afifected  by  it;  namely,  the  lender,  the  corporation,  and 
the    stockholders    of    the    corporation. 

The  directors  are  the  officers  or  agents  of  the  corporation,  and 
represent  the  interests  of  that  abstract  legal  entity,  and  of  those 
who  own  the  shares  of  its  stock.  One  of  the  objects  of  creating 
a  corporation  by  law  is  to  enable  it  to  make  contracts ;  and  these 
contracts  may  be  made  with  its  stockholders,  as  well  as  with 
others.  In  some  classes  of  corporations,  as  in  mutual  insurance 
companies,  the  main  object  of  the  act  of  incorporation  is  to  enable 
the  company  to  make  contracts  with  its  stockholders,  or  with  per- 
sons who  become  stockholders  by  the  very  act  of  making  the  con- 
tract of  insurance.     It  is  very  true,  that  as  a  stockholder,  in  mak- 

23 — Private  Corp. 


354      DIRECTORS,    OFFICERS    AND    AGENTS — MANAGEMENT,     ETC. 

ing  a  contract  of  any  kind  with  the  corporation  of  which  he  is 
a  member,  is  in  some  sense  deaHng  with  a  creature  of  which  he 
is  a  part,  and  holds  a  common  interest  with  the  other  stockhold- 
ers, who,  with  him,  constitute  the  whole  of  that  artificial  entity, 
he  is  properly  held  to  a  larger  measure  of  candor  and  good  faith 
than  if  he  were  not  a  stockholder.  So,  when  the  lender  is  a 
director,  charged,  with  others,  with  the  control  and  management 
of  the  affairs  of  the  corporation,  representing  in  this  regard  the 
aggregated  interest  of  all  the  stockholders,  his  obligation,  if  he 
becomes  a  party  to  a  contract  with  the  company,  to  candor  and 
fair  dealing,  is  increased  in  the  precise  degree  that  his  represen- 
tative character  has  given  him  power  and  control  derived  from 
the  confidence  reposed  in  him  by  the  stockholders  who  appointed 
him  their  agent.  If  he  should  be  a  sole  director,  or  one  of  a 
smaller  number  vested  with  certain  powers,  this  obligation  would 
be  still  stronger,  and  his  acts  subject  to  more  severe  scrutiny,  and 
their  validity  determined  by  more  rigid  principles  of  morality,  and 
freedom  from  motives  of  selfishness.  All  this  falls  far  short, 
however,  of  holding  that  no  such  contract  can  be  made  which  will 
be  valid;  and  we  entertain  no  doubt  that  the  defendant  in  this 
case  could  make  a  loan  of  money  to  the  company;  and  as  we 
have  already  said  that  the  evidence  shows  it  to  have  been  an 
honest  transaction  for  the  benefit  of  the  corporation  and  its  share- 
holders, both  in  the  rate  of  interest  and  in  the  security  taken,  we 
think  it  was  valid  originally,  whether  liable  to  be  avoided  after- 
wards by  the  company  or  not. 

If  it  be  conceded  that  the  contract  by  which  the  defendant  be- 
came the  creditor  of  the  company  was  valid,  we  see  no  principle 
on  which  the  subsequent  purchase  under  the  deed  of  trust  is  not 
equally  so.  The  defendant  was  not  here  both  seller  and  buyer. 
A  trustee  was  interposed  who  made  the  sale,  and  who  had  the 
usual  powers  necessary  to  see  that  the  sale  was  fairly  conducted, 
and  who  in  this  respect  was  the  trustee  of  the  corporation,  and 
must  be  supposed  to  have  been  selected  by  it  for  the  exercise  of 
this  power.  Defendant  was  at  liberty  to  bid,  subject  to  those 
rules  of  fairness  which  we  have  already  conceded  to  belong  to 
his  peculiar  position;  for,  if  he  could  not  bid,  he  would  have  been 
deprived  of  the  only  means  which  his  contract  gave  him  of  mak- 
ing his  debt  out  of  the  security  on  which  he  had  loaned  his 
money.  We  think  the  sale  was  a  fair  one.  The  company  was 
hopelessly  involved  beside  the  debt  to  defendant.  The  well  was 
exhausted,  to  all  appearance.  The  machinery  was  of  little  use 
for  any  other  purpose,  and  would  not  pay  transportation.  Most 
of  the  stockholders  who  now  promote  this  suit  refused^  to  pay 
assessments  on  their  shares  to  aid  the  company.  Nothing  was 
left  to  the  defendant  but  to  buy  it  in,  as  no  one  would  bid  the 
amount  of  his  debt. 

The  next  question  to  be  decided  is,  whether,  under  the  circum- 


TWIN-LICK   OIL   CO.    V.    MARBURY.  355 

Stances  of  this  case,  the  complainant  had  a  right  to  avoid  this 
sale  at  the  time  this  suit  was  brought. 

(The  learned  justice  answered  this  question  in  the  negative 
"because  plaintiff  comes  too  late  with  the  offer  to  avoid  the 
sale.") 

Decree  affirmed. 


CHAPTER  XVI. 

THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

HANDLEY  v.  STUTZ. 
1890. 

Liability  on  Stock  Issued  Below  Par. 


HANDLEY  v.  STUTZ. 
139  U.   S.  417,  35  L.  ed.  227,   II   Sup.  Ct.   530. 


This  was  a  bill  in  equity,  filed  by  Sebastian  Stutz,  of  Pittsburg, 
Pa.,  by  certain  other  persons  composing  the  firm  of  Ragon 
Brothers,  of  Evansville,  Indiana,  and  by  others  composing  the 
firm  of  Louis  Stix  &  Co.,  of  Cincinnati,  Ohio,  on  behalf  of  them- 
selves and  such  other  creditors  of  the  Clifton  Coal  Company 
as  should  come  in  and  contribute  to  the  expense  of  a  suit,  against 
the  Clifton  Coal  Company  and  certain  of  its  stockholders,  to  com- 
pel an  assessment  upon  certain  shares  of  stock  held  by  the  indi- 
vidual defendants,  and  payment  of  the  same  as  a  trust  fund  for 
the  satisfaction  of  the  debts  of  the  company.  The  bill  averred  in 
substance  that  the  Clifton  Coal  Company  was  incorporated  under 
the  laws  of  the  State  of  Kentucky,  in  July,  1883,  with  power  to 
purchase,  lease  and  operate  coal  mines  in  the  State  of  Kentucky, 
a  copy  of  the  articles  of  incorporation  being  annexed  to  the  bill ; 
that  by  said  articles  the  capital  stock  of  such  corporation  was 
fixed  at  $120,000,  divided  into  shares  of  $100  each,  with  power 
to  increase  the  same  to  $200,000,  by  a  majority  vote  of  the  stock- 
holders ;  that  all  the  stock  was  then  taken  and  paid  for  by  the 
subscribers  in  some  manner  agreed  upon  between  them;  that, 
pursuant  to  the  authority  contained  in  the  articles  of  incorpora- 
tion, the  stockholders,  all  of  them  being  present  and  voting,  "at 
a  meeting  duly  held  for  the  purpose  in  May,  1886,  unanimously 
resolved  and  ordered  that  the  capital  stock  of  said  company  be, 
and  in  fact  was  then  increased  to  $200,000  in  shares  of  $100 
each,  being  an  increase  of  800  shares  of  stock  of  said  company;" 
that  of  the  800  shares  then  created,  the  defendant  Handley  sub- 
scribed for  86}i  shares,  two  of  the  other  defendants  for  15 
shares  each,  and  two  others  for  75  shares  each,  certificates  of 
which  were  issued  by  the  company,  and  delivered  to  and  received 
by,  said  subscribers  as  they  were  respectively  entitled;  but  that 
neither  one  of  them  ever  paid  to  the  company  any  part  of  the 
said  shares,  and  they  each,  respectively,  owe  the  said  company 
the  full  par  value  of  the  shares  of  the  said  capital  stock  sub- 
scribed  for   and  issued   to  them. 

The  bill  also  averred  that  on  December  30,  1886,  it  having  been 
previously  resolved  to  issue  bonds  to  the  amount  of  $50,000,  and 

356 


HANDLEY   V.    STUTZ.  357 

to  secure  the  payment  thereof  by  a  mortgage  upon  its  property, 
and  said  mortgage  having  been  executed  to  trustees  and  recorded, 
a  contract  was  executed  and  deHvered  to  the  company  by  certain 
others  of  the  defendants,  whose  names  were  subscribed  thereto, 
in  the  following  terms :  "We,  the  undersigned,  subscribe  for  the 
amount  set  opposite  our  names  respectively,  to  bonds  of  the  Clif- 
ton Coal  Company,  aggregating  $50,000.  It  is  agreed  that  $50,000 
capital  stock  be  distributed  pro  rata  among  the  subscribers  to  the 
above  bonds ;"  that  several  of  the  defendants  subscribed  to  this 
contract,  and  agreed  to  take  bonds  in  different  amounts ;  that  said 
subscribers  paid  the  coal  company  for  the  bonds,  and  that  with 
the  money  thus  received,  to  the  extent  of  $30,000,  the  company 
paid  its  debts  to  certain  of  its  officers  and  managers,  who  had 
become  liable  by  indorsement  for  the  company,  and  that  nothing 
was  or  ever  has  been  paid  for  or  upon  any  of  the  shares  of  cap- 
ital stock  thus  subscribed  for,  and  to  be  distributed  among  them ; 
that  is  to  say,  $50,000  of  said  capital  stock,  equivalent  to  500 
shares  thereof,  was  in  fact  subscribed  for  and  distributed  among 
certain  of  the  defendants,  to  whom  in  ]\Iay,  1887,  there  were 
issued  and   received  by  them  respectively  certificates   for  shares. 

The  bill  further  averred  that  the  plaintiffs  were  judgment  cred- 
itors of  the  company,  by  judgments  obtained  in  the  courts  of 
Kentucky;  that  their  debts  were  created  before  all  of  the  capital 
stock  of  said  company  was  paid  in;  and  that  all  of  said  $80,000 
increase  of  the  capital  stock,  and  each  and  all  of  the  amounts 
due  to  the  company  for  any  part  of  its  capital  stock,  constituted 
a  trust  fund  for  their  benefit,  which  they  were  entitled  to  have 
administered  in  a  court  of  equity  to  the  satisfaction  of  their  said 
debts,  the  company  being  insolvent. 

It  further  appeared  from  the  testimony  that  the  company  was 
organized  soon  after  its  articles  of  incorporation  were  filed ; 
that  its  chief  office  was  at  jMannington,  Kentucky ;  and  that  it 
began  business  at  once  and  made  large  outlays  and  expenditures 
for  machinery,  buildings,  materials  and  labor.  In  the  early  part 
of  the  year  1886,  the  company  was  led  to  believe  that  its  coal 
would  coke,  and  therefore  its  products  could  be  profitably  ex- 
tended from  grate  and  steam  purposes  to  iron-making  coke.  To 
embark  in  the  manufacture  of  coke,  however,  money  was  needed, 
and  a  meeting  of  the  stockholders  was  held  March  31,  1886,  at 
which  a  resolution  was  passed,  reciting  that  $50,000  was  needed 
with  which  to  erect  coke  ovens,  buildings,  improvements,  etc.,  to 
further  develop  the  property ;  and  it  was  unanimously  resolved 
to  issue  $50,000  of  bonds  of  the  company,  in  sums  of  $1,000 
each,  due  thirty  years  from  April  i,  with  6  per  cent,  interest,  and 
secured  by  trust  mortgage  upon  the  property  of  the  company, 
and  the  president  was  authorized  to  dispose  of  such  bonds  as  in 
his  discretion  seemed  best.  The  mortgage  was  executed  to  the 
designated  trustee  and  recorded.  It  was  found,  however,  that 
the  bonds  could  not  be  sold,  and  to  meet  the  demands  upon  the 


358  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

company  for  money,  it  borrowed  a  large  amount  upon  its  notes, 
indorsed  by  its  directors  and  stockholders  and  to  secure  the  lend- 
ers and  indorsers,  the  $50,000  of  bonds  were  deposited  in  two 
banks  in  Nashville,  Tennessee,  as  additional  collateral  security 
for  the  loans.  Finding  that  no  one  would  purchase  the  bonds, 
and  being  advised  that  in  order  to  effect  their  sale  it  would  be 
better  to  add  an  equal  amount  of  stock  to  the  bonds,  and  pro- 
pose to  the  purchasers  of  such  bonds  to  give  as  a  gratuity  $1,000 
of  stock  with  each  $1,000  bond,  a  meeting  of  the  stockholders  of 
the  company  was  held  at  Nashville,  May  31,  1886,  at  which  all 
the  stockholders  were  present  in  person  or  by  proxy,  although 
without  any  call  or  previous  notice  and  "it  was  unanimously  re- 
solved that  the  capital  stock  of  the  company  be  increased  to 
$200,000,  as  authorized  by  the  charter."  This  resolution  was 
not  then  entered  upon  the  records  of  the  corporation,  but  was 
formulated  in  the  shape  of  a  pencil  memorandum,  and  adopted 
unanimously,  although  no  vote  appeared  to  have  been  taken,  and 
no  formal  record  was  made  of  the  meeting  until  the  summer  of 
1888.  No  notice  of  such  change  in  the  amount  of  its  capital 
stock  was  recorded  or  published,  as  required  by  the  laws  of  Ken- 
tucky. The  subscribers  to  the  bonds  subsequently  executed  the 
agreement  set  forth  in  the  bill,  and  bonds  to  the  amount  of  $45,- 
000  were  delivered  to  the  subscribers  with  equal  amounts  of  cer- 
tificates of  "paid-up"  stock,  the  receipts  reciting  that  it  "was  is- 
sued with  bonds  for  same  amount,  as  per  agreement."  The  cer- 
tificates on  their  face  recited  that  the  shares  of  stock  were  fully 
paid  up  "and  were  non-assessable,"  or  language  to  that  effect. 
Five  thousand  dollars  of  the  bonds  were  left  in  one  of  the  na- 
tional banks  at  Nashville  as  collateral  security  for  a  loan  to  the 
company,  no  one  having  subscribed  for  them.  The  remaining 
$30,000  shares  of  increased  stock,  which  were  not  needed  to  se- 
cure the  subscribers  to  the  bonds,  appeared  to  have  been  distrib- 
uted pro  rata  among  the  old  stockholders.  In  the  latter  part  of 
1887,  and  in  the  early  part  of  the  following  year,  plaintiff  ob- 
tained judgments  against  the  company,  which  were  unsatisfied, 
and  in  September,  1887,  by  an  order  of  the  Circuit  Court  of 
Hopkins  County,  Kentucky,  the  entire  property  of  the  company 
was  placed  in  the  hands  of  a  receiver,  and  its  operation  stopped. 
On  February  8,  1889,  this  bill  was  filed  against  the  coal  com- 
pany and  the  holders  of  this  increased  stock,  to  compel  payment 
therefor,  and  to  recover  the  amounts  of  the  judgments  against 
the  company.  The  court  dismissed  the  bill  as  to  three  of  the  de- 
fendants not  served  with  process,  and  as  to  the  rest  held  them 
liable  to  all  the  creditors  of  the  company  whose  debts  originated 
after  the  alleged  increase  of  stock,  and  fixed  May,  1886,  as  the 
date  of  such  increase.  As  to  debts  contracted  prior  to  that  date, 
they  were  excluded  because,  as  between  the  company  and  the 
stockholders,  the  latter  held  such  stock  properly,  and  without  lia- 
bility to  the  company  and  all  creditors  who  dealt  with  the  com- 


IIANDLEY    V.    STUTZ.  359 

pany  prior  to  such  increase,  and  not  upon  the  faith  of  such  stock, 
had  no  equity  to  demand  more  than  the  company  itself  could. 
Five  of  the  defendants  against  whom  decrees  were  rendered  in 
excess  of  $5,000  appealed  to  this  court,  and  the  circuit  court  sus- 
pended the  execution  of  the  decree  as  to  those  who  could  not  ap- 
peal until  this  court  should  determine  the  rights  of  the  appellants. 
The  opinion  of  the  circuit  court  is  reported  in  41  Fed.  Rep.  531. 

MR.  JUSTICE  BROWN  delivered  the  opinion  of  the   court: 

*     *     * 

So  far  as  the  question  of  liability  to  the  proposed  assessments 
is  concerned,  these  defendants,  with  respect  to  their  relations  to 
this  corporation,  are  divisible  into  two  distinct  classes :  First, 
those  of  the  original  stockholders  who  received  the  $30,000  in- 
creased stock  as  a  gift;  second,  those  who  subscribed  to  the  $50,- 
000  bonds,  and  received  an  equal  amount  of  stock  as  a  bonus  or 
inducement  to  make  the  subscription. 

With  regard  to  the  first  class,  namely,  the  original  stockholders, 
who  voted  for  this  increase  of  shares,  and  then  distributed  among 
themselves  300  of  those  shares,  without  the  shadow  of  right  or 
consideration,  it  is  difficult  to  see  why  they  could  not  be  called 
upon  to  respond  for  their  value.  The  only  claim  made  upon  their 
behalf  is  that  they  never  agreed  to  contribute  or  pay  for  the 
same;  that  the  stock  was  expressly  declared  to  be  "fully  paid" 
and  "free  from  all  claims  or  demands  upon  the  part  of  the  com- 
pany ;"  that  there  was  no  evidence  that  the  creditors  of  the  com- 
pany knew  of,  or  relied  upon,  this  increase,  in  their  dealings 
with  the  company;  and  that  they  had  a  right  to  return  and  sur- 
render the  same,  which  they  offered  to  do.  There  is  no  reason 
to  suppose  that  these  stockholders  did  not  act  in  good  faith,  and 
in  the  belief  that  they  were  entitled  to  this  stock.  The  fact  that 
they  did  not  subscribe  for  it  or  agree  to  take  it  until  the  receipt 
of  the  certificates  is  immaterial,  as  the  acceptance  of  the  certifi- 
cates is  sufficient  evidence  of  an  agreement  to  pay  their  par  value. 
Sanger  v.  Upton,  91  U.  S.  56,  64;  Chubb  v.  Upton,  95  U.  S. 
665 ;  Brigham  v.  Mead,  10  Allen,  245. 

Ever  since  the  case  of  Sawyer  v.  Hoag,  84  U.  S.  (17  Wall.) 
610,  it  has  been  the  settled  doctrine  of  this  court  that  the  capital 
stock  of  an  insolvent  corporation  is  a  trust  fund  for  the  payment 
of  its  debts ;  that  the  law  implies  a  promise  by  the  original  sub- 
scribers of  stock  who  did  not  pay  for  it  in  money  or  other  prop- 
erty to  pay  for  same  when  called  upon  by  creditors ;  and  that  a 
contract  between  themselves  and  the  corporation,  that  the  stock 
shall  be  treated  as  fully  paid  and  non-assessable,  or  otherwise 
limiting  their  liability  therefor,  is  void  as  against  creditors.  The 
decisions  of  this  court  upon  this  subject  have  been  frequent  and 
uniform,  and  no  relaxation  of  the  general  principle  has  been  ad- 
mitted. Upton  V.  Tribilcock,  91  U.  S.  45;  Sanger  v.  Upton.  91 
U.  S.  56;  Webster  v.  Upton,  91  U.  S.  65;  Chubb  v.  Upton,  95 


360  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

U.  S.  665;  Pullman  v.  Upton,  96  U.  S.  328;  Morgan  County  v. 
Allen,  103  U.  S.  498;  Hawkins  v.  Glenn,  131  U.  S.  319;  Graham 
V.  LaCrosse  &  M.  R.  Co.,  102  U.  S.  148,  161 ;  Richardson  v. 
Green,   133  U.  S.  30. 

It  is  simply  in  affirmative  of  this  general  principle  that  section 
14,  chapter  56,  of  the  General  Statutes  of  Kentucky  declares 
that  nothing  in  the  Act  conferring  corporate  franchises,  or  per- 
mitting the  organization  of  corporations,  "shall  exempt  the  stock- 
holders of  any  corporation  from  individual  liability  to  the  amount 
of  the  unpaid  installments  on  stock  owned  by  them."  If  the  cor- 
poration has  no  right,  as  against  creditors,  to  sell  or  dispose  of 
this  stock  with  an  agreement  that  no  further  assessment  shall 
be  made  upon  it,  much  less  has  it  the  right  to  give  it  away,  or 
distribute  it  among  shareholders,  without  receiving  a  fair  equiva- 
lent therefor,  and  thereby  induce  the  public  to  deal  with  it  upon 
the  credit  of  such  shares,  as  representing  the  assets  of  the  cor- 
poration. Upton  Mutual  L.  Ins.  Co.  v.  Free  Stone  Mfg.  C.o., 
97  111.  537.  The  stock  of  a  corporation  is  supposed  to  stand  in 
the  place  of  actual  property  of  substantial  value,  and  as  being  a 
convenient  method  of  representing  the  interest  of  each  stock- 
holder in  such  property,  and  to  the  extent  to  which  it  fails  to  rep- 
resent such  value,  it  is  either  a  deception  and  fraud  upon  the 
public,  or  an  evidence  that  the  original  value  of  the  corporate 
property  has  become  depreciated.  The  market  value  of  such 
shares  rises  with  an  increase  in  the  value  of  the  corporate  assets, 
and  falls  in  case  of  loss  or  misfortune,  whereby  the  value  of  such 
assets  is  impaired.  And  the  increase  of  value  of  such  stock  is 
taken  to  represent  either  an  appreciation  in  value  of  the  com- 
pany's property  beyond  the  par  value  of  the  original  shares,  or 
so  much  money  paid  to  the  corporation  as  is  represented  by 
such  shares.  If  it  be  once  admitted  that  a  corporation  may  issue 
stock  without  receiving  a  consideration  therefor,  and  where  it 
does  not  represent  actual  or  substituted  value  in  corporate  assets, 
there  is  apparently  no  limit  to  the  extent  to  which  the  original 
stock  may  be  "watered,"  except  the  caprice  of  the  stockholders. 
While  an  agreement  that  the  subscribers  or  holders  of  stock  shall 
never  be  called  upon  to  pay  for  the  same  may  be  good  as  against 
the  corporation  itself,  it  has  been  uniformly  held  by  this  court 
not  to  be  binding  upon  its  creditors. 

Somewhat  different  considerations  apply  to  those  who  subscribed 
for  the  bonds  of  the  company,  with  the  understanding  that  they 
were  to  receive  an  amount  of  stock  equal  to  the  bonds  as  an  ad- 
ditional inducement  to  their  subscription.  The  facts  connected 
with  this  transaction  are  substantially  as  follows :  Some  three 
years  after  the  company  was  organized  it  became  apparent  that 
the  enterprise,  as  originally  contemplated,  namely,  the  mining  and 
selling  of  coal  for  steam  and  domestic  purposes,  was  not  likely 
to  be  a  success,  owing  to  the  inferior  character  of  the  product; 
and  the  only  hope  of  the  company  lay  in  the  manufacture  of  the 


HANDLEY    V.    STUTZ.  361 

coal  into  an  iron-making  coke,  that  is,  a  coke  containing  a  per- 
centage of  sulphur  low  enough  to  admit  of  the  manufacture  of 
merchantable  pig-iron.  To  embark  in  this,  however,  money  was 
needed,  and  as  the  stock  of  the  company  was  not  worth  more 
than  fifty  cents  on  the  dollar,  it  was  evident  this  could  not  be 
effected  simply  by  the  issue  of  new  stock.  It  was  proposed  at 
the  meeting  in  March  that  money  should  be  raised  by  the  issue 
of  $50,000  of  bonds,  with  which  to  add  the  requisite  structures  to 
the  plant.  But  it  was  soon  evident  that  the  bonds  could  not  be 
negotiated  without  the  stock,  and  acting  upon  the  suggestion  of  a 
Nashville  banker,  it  was  resolved  at  the  meeting  in  May  that  the 
stock  should  be  increased  800  shares,  500  of  which  should  be 
turned  over  to  the  subscribers  to  the  bonds,  as  a  bonus  or  an 
additional  consideration.  The  evidence  is  uncontradicted  that  the 
bonds  could  not  have  been  negotiated  without  the  stock;  that  they 
were  both  sold  as  whole;  that  the  transaction  was  in  good  faith, 
and,  considering  the  risk  that  was  taken  by  the  subscribers,  the 
price  paid  for  the  stock  and  bonds  was  fair  and  reasonable.  The 
directors  appear  to  have  done  all  in  their  power  to  obtain  the 
best  possible  terms,  and  there  is  no  imputation  of  unfair  dealing 
on  the  part  of  anyone  connected  with  the  transaction.  At  that 
time  the  mines  and  property  of  the  company  were  in  good  con- 
dition, and  the  prospects  of  success  were  fair. 

The  case  then  resolves  itself  into  the  question  whether  an 
active  corporation,  or,  as  it  is  called  in  some  cases,  a  "going  con- 
cern," finding  its  original  capital  impaired  by  loss  or  misfortune, 
may  not,  for  the  purpose  of  recuperating  itself  and  providing  new 
conditions  for  the  successful  prosecution  of  its  business,  issue  new 
stock,  put  it  upon  the  market  and  sell  it  for  the  best  price  that 
can  be  obtained.  The  question  has  never  been  directly  raised  be- 
fore in  this  court,  and  we  are  not,  consequently,  embarrassed  by 
any  previous  decisions  on  the  point.  In  the  Upton  Cases  arising 
out  of  the  failure  of  the  Great  Western  Insurance  Company,  in 
Hatch  V.  Dana,  loi  U.  S.  205,  and  in  Hawkins  v.  Glenn,  131 
U.  S.  319,  the  defendants  were  either  original  subscribers  to  the 
increased  stock,  at  a  price  far  below  its  par  value,  or  transferees 
of  such  subscribers;  and  the  stock  was  issued,  not  as  in  this  case, 
to  purchase  property  or  to  raise  money,  to  add  to  the  plant  and 
facilitate  the  operations  of  the  company,  but  simply  to  increase  its 
original  stock  in  order  to  carry  on  a  larger  business,  and  the  stock 
thus  issued  was  treated  as  if  it  formed  a  part  of  the  original  cap- 
ital. In  Morgan  County  v.  Allen,  103  U.  S.  498,  the  same  prin- 
ciple w^as  applied  to  a  subscription  by  a  county  to  the  capital  stock 
of  a  railroad  company,  for  which  it  had  issued  its  bonds,  although 
such  bonds  had  been  surrendered  to  the  county  with  the  consent 
of  certain  of  its  creditors. 

To  say  that  a  corporation  may  not,  imder  the  circumstances 
above  indicated,  put  its  stock  upon  the  market  and  sell  it  to  the 
highest   bidder,   is   practically   to   declare   that   a   corporation   can 


362  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

never  increase  its  capital  by  a  sale  of  shares,  if  the  original  stock 
has   fallen  below  par.     The  wholesome  doctrine,   so  many  times 
enforced  by  this  court,  that  the  capital  stock  of  an  insolvent  cor- 
poration is  a  trust  fund  for  the  payment  of  its  debts,  rests  upon 
the  idea  that  the  creditors  have  a  right  to  rely  upon  the  fact  that 
the  subscribers  to  such  stock  have  put  into  the  treasury  of  the 
corporation  in  some  form,  the  amount  represented  by  it;  but  it 
does  not  follow  that  every  creditor  has  a  right  to  trace  each  share 
of    stock    issued   by    such    corporation,    and    inquire    whether    its 
holder,  or  the  person  of  whom  he  purchased  has  paid  its  par  value 
for  it.     It  frequently  happens  that  corporations,  as  well  as  indi- 
viduals, find  it  necessary  to  increase  their  capital  in  order  to  raise 
money  to  prosecute  their  business   successfully,   and   one  of   the 
most  frequent  methods  resorted  to  is  that  of  issuing  new_  shares 
of  stock  and  putting  them  upon  the  market  for  the  best  price  that 
can  be  obtained;  and  so  long  as  the  transaction  is  bona  fide,  and 
not  a  mere  cover  for  "watering"  the  stock,  and  the  consideration 
obtained  represents  the  actual  value  of  such  stock,  the  courts  have 
shown  no  disposition  to  disturb  it.     Of  course  no  one  would  take 
stock  so  issued  at  a  greater  price  than  the  original  stock  could  be 
purchased   for,  and  hence  the  ability  to  negotiate  the  stock  and 
to  raise  the  money  must  depend  upon  the  fact  whether  the  pur- 
chaser shall  or  shall  not  be  called  upon  to  respond   for  its  par 
value.     While,  as  before  observed,  the  precise  question  has  never 
been   raised   in   this   court,   there   are   numerous   decisions   to   the 
effect  that   the   general   rule   that   holders    of   stock,   in   favor   of 
creditors  must  respond  for  its  par  value,  is  subject  to  exceptions 
where   the   transaction   is   not   a   mere   cover    for   an    alleged    in- 
crease      *     H'     * 

A  case  nearer  in  point  is  that  of  Clark  v.  Bever,  139  U.  S.  96, 
decided  at  the  present  term  of  this  court.  In  this  case,  a  railroad 
company,  of  which  defendant's  intestate  was  president  and  stock- 
holder, had  a  settlement  with  a  construction  company,  of  which 
defendant's  intestate  was  also  a  member,  for  work  done  in  build- 
ing the  road.  The  railroad  company,  being  unable  to  pay  the 
claim  of  the  construction  company,  delivered  to  it  thirty-five  hun- 
dred shares  of  its  stock  at  20  cents  on  the  dollar,  and  the  same 
were  accepted  in  full  satisfaction  of  the  debt.  The  stock  was  not 
worth  anything  in  the  market,  and  was  issued  directly  to  the 
defendant's  intestate.  No  other  payment  than  the  20  per  cent, 
was  ever  made  on  account  of  this  stock.  A  judgment  creditor  of 
the  railroad  company  filed  a  bill  to  compel  the  payment  by  the 
defendant  of  his  claim  upon  the  theory  that  he  was  liable  for  the 
actual  par  value  of  such  stock,  whatever  may  have  been  its 
market  value  at  the  time  it  was  received.  It  was  held  he  could 
not  recover.  "Of  course  under  this  view,"  said  Mr.  Justice  Har- 
lan, in  delivering  the  opinion  of  the  court,  "everyone  havmg 
claim  against  the  railway  company— even  laborers  and  employes— 
who  could  get  nothing  except  stock  in  payment  of  their  demands, 


HANDLEY    V.    STUTZ.  363 

became  bound,  by  accepting  stock  at  its  market  value  in  payment, 
to  account  to  unsatisfied  judgment  creditors  for  its  full  face  value, 
although,  at  the  time  it  was  sought  to  make  them  liable,  the  cor- 
poration had  ceased  to  exist,  and  its  stock  had  ceased  to  exist, 
and  its  stock  had  remained,  as  it  was  when  taken,  absolutely 
worthless.  *  *  *  Xo  say  that  a  public  corporation,  charged 
with  public  duties,  may  not  relieve  itself  from  embarrassment  by 
paying  its  debt  in  stock  at  its  real  value — there  being  no  statute 
forbidding  such  a  transaction — without  subjecting  the  creditor, 
surrendering  its  debt,  to  the  liability  attaching  to  stockholders  who 
have  agreed,  expressly  or  impliedly,  to  pay  the  face  value  of  stock 
subscribed  by  them,  is,  in  eJffect,  to  compel  them  either  to  suspend 
operations  the  moment  they  become  unable  to  pay  their  current 
debts  or  to  borrow  money  secured  by  mortgage  upon  the  corporate 
property." 

So  in  Fogg  V.  Blair,  139  U.  S.  118,  also  decided  at  the  present 
term,  it  was  held  to  be  competent  for  a  railroad,  exercising  good 
faith,  to  use  its  bonds  or  stocks  in  payment  for  the  construction 
of  its  road,  although  it  could  not,  as  against  creditors  or  stock- 
holders, issue  its  stock  as  fully  paid  without  getting  some  fair  or 
reasonable   equivalent    for   it.      It   was   there    said:      "What    was 
such  an  equivalent  depends  primarily  upon  the  actual  value  of  the 
stock  at  the  time  it  was  contracted  to  be  issued,  and  upon  the 
compensation  which,  under  all  the  circumstances,  the  contractors 
were  equitably  entitled  to  receive  for  the  particular  work  under- 
taken or  done  by  them."     It  appeared  in  that  case  that  full  and 
adequate  compensation   for  the  work  done  had  been  paid  by  the 
company  in  its  mortgage  bonds,  and,  as  the  bill  contained  no  al- 
legation whatever  as  to  the  real  or  market  value  of  such  stock,  it 
was  held  that  the  contractors  receiving  this  stock  were  not  liable 
to  creditors  for  its  par  value.     It  was  added:     "If,  when  disposed 
of  by  the  railroad  company,  it  was  without  value,  no  wrong  was 
done  to  creditors  by  the  contract  made  with   Blair  and   Taylor. 
If  the  plaintiflf  expected  to  recover  in  this  suit  on  the  ground  that 
the  stock  was  of  substantial  value,  it  was  incumbent  upon  him  to 
distinctly  allege  facts  that  would  enable  the  court — assuming  such 
facts  to  be  true — to  say  that  the  contract  between  him  and  the 
railroad  company  and   the  contractors  was  one  which,  in  the  in- 
terest  of    creditors,    ought   to   be   closely    scrutinized."      It    would 
seem  to  follow  from  this  that  if  the  stock  had  been  of  some  value, 
that  value,   however   much   less   than   par,   would   have   been   the 
limit   of  the  holder's   liability. 

In  Morrow  v.  Nashville  I.  S.  Co.,  87  Tenn.  262,  the  Supreme 
Court  of  Tennessee  held  that  a  contract  with  a  subscriber  to 
stock  of  a  corporation,  that  for  every  share  subscribed  he  should 
receive  bonds  to  an  equal  amount,  secured  by  mortgage  on  the 
company's  plant,  is  void  as  against  creditors,  and  also  between 
the  subscriber  and  the  corporation.  But  the  court  drew  distinc- 
tion between  such  a  case  and  sales  of  or  subscription  to  the  stock 


364  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

of  an  organized  and  going  corporation.  It  said:  "The  necessi- 
ties of  the  business  of  an  organized  company  might  demand  an 
increase  of  capital  stock,  and  if  such  stock  is  lawfully  issued,  it 
may  very  well  be  offered  upon  special  terms.  In  such  case,  if  the 
market  price  was  less  than  par,  it  is  clear  that  a  purchaser  or 
subscriber  for  such  stock  at  its  market  value  would,  in  the  ab- 
sence of  fraud,  be  liable  only  for  his  contract  price.  So  a  case 
might  arise  where  the  stock  of  a  going  concern  was  much  depre- 
ciated, and  where  its  bonds  were  likewise  below  par,  and  there 
was  lawful  authority  to  issue  additional  stock  and  bonds.  Now, 
in  such  case,  the  real  market  value  of  an  equal  amount  of  stock 
and  bonds  might  not  exceed,  or  even  equal  the  par  value  of  either. 
In  such  cases,  the  question  of  fraud  aside,  the  purchaser  would 
only  be  held  for  his  contract  price."  This  case  from  Tennessee 
puts  as  an  illustration  the  exact  case  with  which  we  are  now 
dealing. 

The  liability  of  a  subscriber  for  the  par  value  of  increased 
stock  taken  by  him  may  depend  somewhat  on  the  circumstances 
under  which,  and  the  purpose  for  which,  such  increase  was  made. 
If  it  be  merely  for  the  purpose  of  adding  to  the  original  capital 
stock  of  the  corporation,  and  enabling  it  to  do  a  larger  and  more 
profitable  business,  such  subscriber  would  stand  practically  upon 
the  same  basis  as  a  subscriber  to  the  original  capital.  But  we 
think  that  an  active  corporation  may,  for  the  purpose  of  paying 
its  debts,  and  obtaining  money  for  the  successful  prosecution  of 
its  business,  issue  its  stock  and  dispose  of  it  for  the  best  price 
that  can  be  obtained.  Stein  v.  Howard,  65  Cal.  616.  _  As  the 
company  in  this  case  found  it  impossible  to  negotiate  its  bonds 
at  par  without  the  stock,  and  as  the  stock  was  issued  for  the 
purpose  of  enhancing  the  value  of  the  bonds,  and  was  taken  by 
the  subscribers  to  the  bonds  at  a  price  fairly  representing  the 
value  of  both  stocks  and  bonds,  we  think  the  transaction  should 
be  sustained,  and  that  the  defendants  cannot  be  called  upon  to 
respond  for  the  par  value  of  such  stock,  as  if  they  had  subscribed 
to  the  original  stock  of  the  company.  Our  conclusion  upon  this 
branch  of  the  case  disposes  of  it  as  to  those  who  were  held  liable 
by  virtue  of  their  subscription  to  the  bonds. 

We  have  no  doubt  the  learned  circuit  judge  held  correctly 
that  it  was  only  subsequent  creditors  who  were  entitled  to  en- 
force their  claims  against  these  stockholders,  since  it  is  only  they 
who  could,  by  any  legal  presumption,  have  trusted  the  company 
upon  the  faith  of  the  increased  stock.  First  Nat.  Bank  of 
Dcadwood  v.  Gustin  Minerva  Con.  Min.  Co.,  42  Minn.  327; 
2  Morawetz  on  Corporations,  §§  832,  833;  Coit  v.  North  Caro- 
lina Gold  Amalgamating  Co.,  14  Fed.  Rep.  12.  We  also  agree 
with  him  that  creditors,  who  became  such  after  the  increase  was 
voted  in  May,  1886,  are  entitled  to  look  to  those  who  subse- 
quently received  the  stock,  notwithstanding  they  did  not  receive 
it  until  after  the  debts  had  been  contracted.     The  circuit  judge 


HANDLEY    V.    STUTZ.  365 

found  in  this  connection  that  the  "complainants  had  no  knowl- 
edge or  notice  of  the  subscription  paper  of  December  30,  1880, 
under  which  $45,000  of  the  new  stock  was  distributed  to  those 
who  subscribed  for  bonds,  nor  of  the  distribution  among  the  old 
stockholders  of  $30,000  of  said  increased  stock;  nor  does  it  af- 
firmatively appear  that  they  or  either  of  them  dealt  with  and 
trusted  the  company  upon  the  faith  of  that  increased  stock ;  but 
the  fact  that  the  capital  stock  had  been  increased  to  $200,000 
was  made  public  and  was  generally  known."  The  real  question 
in  this  connection  is — when  may  it  be  presumed  creditors  trusted 
the  corporation  upon  the  faith  of  the  increased  stock?  Obvious- 
ly, when  such  increase  was  ordered.  That  is  a  fact  to  which  pub- 
licity would  naturally  be  given ;  the  creditors  could  not  be  ex- 
pected to  know  when  and  by  whom  such  stock  would  be  taken. 
It  is  true  they  assume  the  risk  of  the  stock  not  being  taken  at  all, 
but  the  moment  shares  are  taken,  they  are  supposed  to  represent 
so  much  money  put  into  the  treasury  as  they  are  worth,  which 
becomes  available  for  the  payment,  not  only  of  future,  but  of  ex- 
isting creditors.  It  is  manifest  that  any  attempt  to  gauge  the 
liability  of  stockholders  by  the  exact  time  they  took  their  stock 
with  reference  to  the  dates  when  the  several  claims  of  the  cred- 
itors accrued,  and  by  the  further  fact  whether  the  creditors  actu- 
ally knew  of  and  relied  upon  such  stock,  would  in  case  like  this, 
where  the  creditors  and  stockholders  are  both  numerous,  lead 
into  inextricable  confusion.  Even  the  flexibility  of  a  court  of 
equity  would  be  inadequate  to  adjust  the  rights  of  the  par- 
ties.    *     *     * 

It  results  that  the  decree  of  the  court  below  must  be  reversed 
and  the  cause  remanded  for  further  proceedings  in  conformity 
with  this  opinion. 

MR.  CHIEF  JUSTICE  FULLER,  with  whom  concurring  MR. 
JUSTICE  LAMAR,  dissenting: 

I  dissent  from  the  conclusion  of  the  court  in  respect  of  the 
stock  received  by  the  subscribers  to  the  bonds.  That  stock  was 
not  paid  for  in  money  or  money's  worth,  or  issued  in  payment  of 
debts  due  from  the  company,  or  purchased  at  sale  upon  the 
market.  It  was  a  mere  bonus,  thrown  in  with  the  bonds  as 
furnishing  the  inducement  to  the  bond  subscription,  of  larger  con- 
trol over  the  corporation,  and  of  possible  gain  without  expendi- 
ture. Becoming  secured  creditors  through  the  bonds,  the  sub- 
scribers increased  their  power  through  the  stock.  In  my  view, 
there  was  no  actual  payment  for  the  stock,  and  to  treat  it  as 
paid  up  is  to  sanction  an  arrangement  to  relieve  those  who  could 
reap  the  benefit  derived  from  the  possession  of  the  stock,  in  the 
event  of  the  success,  from  liability  for  the  consequences,  in  the 
event  of  the  failure,  of  the  enterprise. 

When  the  capital  stock  of  a  corporation  has  become  impaired, 
or   the   business   in   which   it   has   engaged    has   proven   so    unre- 


366  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

munerative  as  to  call  for  a  change,  creditors  at  large  may  well 
demand  that  experiments  at  rehabilitation  should  not  be  conducted 
at  their  risk. 

My  brother  Lamar  concurs  with  me  in  this  dissent. 


COIT  V.  GOLD  AMALGAMATING  CO. 

1886.     119  U.  S.  343,  30  L.  ed.  420. 
Shares  Issued  in   Consideration  of  Property. 

MR.  JUSTICE  FIELD:  The  defendant,  the  North  Carolina 
Gold  Amalgamating  Company,  was  incorporated  under  the  laws 
of  North  Carolina  on  the  30th  of  January,  1874,  for  the  purpose, 
among  other  things,  of  working,  milling,  smelting,  reducing  and 
assaying  ores  and  metals,  with  the  power  to  purchase  such  prop- 
erty, real  and  personal,  as  might  be  necessary  in  its  business,  and 
to  mortgage  or  sell  the  same. 

The  plaintiff  is  the  holder  of  a  judgment  against  the  company 
for  $5,489,  recovered  in  the  Court  of  Common  Pleas  of  Philadel- 
phia, on  the  i8th  of  May,  1879,  upon  its  two  drafts,  one  dated 
June  I,  1874,  and  the  other  August  15,  1874,  each  payable  four 
months  after  its  date.  Unable  to  obtain  satisfaction  of  this  judg- 
ment upon  execution,  and  finding  that  the  company  was  insol- 
vent, the  plaintiff  brought  this  suit  to  compel  the  stockholders  to 
pay  what  he  claims  to  be  due  and  unpaid  on  the  shares  of  the 
capital  stock  held  by  them,  alleging  that  he  had  frequently  ap- 
plied to  the  officers  of  the  company  to  institute  a  suit  for  that 
purpose,  but  that  under  various  pretenses  they  refused  to  take 
any  action  in  the  premises. 

By  its  charter  the  minimum  capital  stock  was  fixed  at  $100,- 
000,  divided  into  1,000  shares  of  $100  each,  with  power  to  in- 
crease it  from  time  to  time,  by  a  majority  vote  of  the  stockhold- 
ers, to  two  million  and  a  half  of  dollars.  The  charter  provided 
that  the  subscription  to  the  capital  stock  might  be  paid  "in  such 
installments,  in  such  manner  and  in  such  property,  real  and  per- 
sonal," as  a  majority  of  the  corporators  might  determine,  and 
that  the  stockholders  should  not  be  liable  for  any  loss  or  dam- 
ages, or  be  responsible  beyond  the  assets  of  the  company. 

Previously  to  the  charter  the  corporators  had  been  engaged  in 
mining  operations,  conducting  their  business  under  the  name  and 
title  which  they  took  as  a  corporation.  Upon  obtaining  the  char- 
ter the  capital  stock  was  paid  by  the  property  of  the  former  asso- 
ciation, which  was  estimated  to  be  of  the  value  of  $100,000,  the 
shares  being  divided  among  the  stockholders  in  proportion  to 
their  respective  interests  in  the  property.  Each  stockholder  placed 
his  estimate  upon  the  property,  and  the  average  estimate  amount- 


COIT    V.    GOLD   AMALGAMATING    CO.  367 

ed   to  $137,500.     This   sum  they   reduced  to  $100,000,   inasmuch 
as  the  capital  stock  was  to  be  of  that  amount. 

The  plaintiff  contends,  and  it  is  the  principal  basis  of  his  suit, 
that  the  valuation  thus  put  upon  the  property  was  illegally  and 
fraudulently  made  at  an  amount  far  above  its  actual  value,  aver- 
ring that  the  property  consisted  only  of  a  machine  for  crushing 
ores,  the  right  to  use  a  patent  called  the  Crosby  process,  and  the 
charter  of  the  proposed  organization;  that  the  articles  had  no 
market  or  actual  value,  and,  therefore,  that  the  capital  stock 
issued  thereon  was  not  fully  paid,  or  paid  to  any  substantial  ex- 
tent, and  that  the  holders  thereof  were  still  liable  to  the  corpora- 
tion and  its  creditors  for  the  unpaid  subscription. 

If  it  were  proved  that  actual  fraud  was  committed  in  the  pay- 
ment of  the  stock,  and  that  the  complainant  had  given  credit  to 
the  company  from  a  belief  that  its  stock  was  fully  paid,  there 
would  undoubtedly  be  substantial  ground  for  the  relief  asked. 
But  where  the  charter  authorizes  capital  stock  to  be  paid  in  prop- 
erty, and  the  shareholders  honestly  and  in  good  faithput  in  prop- 
erty instead  of  money,  in  payment  of  their  subscriptions,  third 
parties  have  no  ground  of  complaint.  The  case  is  very  different 
from  that  in  which  subscriptions  to  stock  are  payable  in  cash, 
and  where  only  a  part  of  the  installments  has  been  paid.  _  In  that 
case  there  is  still  a  debt  due  to  the  corporation,  which,  if  it  be- 
come insolvent,  may  be  sequestered  in  equity  by  the  creditors,  as 
a  trust  fund  liable  to  the  payment  of  their  debts.  But  where  full- 
paid  stock  is  issued  for  property  received  there  must  be  actual 
fraud  in  the  transaction  to  enable  creditors  of  the  corporation  to 
call  the  stockholders  to  account.  A  gross  and  obvious  overvalu- 
ation of  property  would  be  strong  evidence  of  fraud.  Boynton  v. 
Hatch,  47  N.  Y.  225;  Van  Cott  v.  Van  Brunt,  82  N.  Y.  535; 
Carr  v.  LeFevre,  27  Pa.  St.  413. 

But  the  allegation  of  intentional  and  fraudulent  overvaluation 
of  the  property  is  not  sustained  by  the  evidence.  The  patent  and 
the  machinery  had  been  used  by  the  corporators  in  their  business, 
which  was  continued  under  the  charter.  They  were  immediately 
serviceable,  and  therefore  had  to  the  company  a  present  value. 
The  corporators  may  have  placed  too  high  an  estimate  upon  the 
property,  but  the  court  below  finds  that  its  valuation  was  hon- 
estly and  fairly  made ;  and  there  is  only  one  item,  the  value  of  the 
chartered  privileges,  which  is  at  all  liable  to  any  legal  objection. 
But  if  that  were  deducted,  the  remaining  amount  would  be  so 
near  to  the  aggregate  capital  that  no  implication  could  be  raised 
against  the  entire  good  faith  of  the  parties  in  the  transaction. 

In  May,  1874.  the  company  increased  its  stock,  as  it  was  au- 
thorized to  do  by  its  charter,  to  $1,000,000,  or  10,000  shares  of 
$100  each.  This  increase  was  made  pursuant  to  an  agreement 
with  one  Howes,  by  which  the  company  was  to  give  him  2.000 
shares  of  the  increased  stock  for  certain  lands  purchased  from 
him.     Of  the  balance  of  the  increased  shares  4,000  were  divided 


368  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

among  the  holders  of  the  original  stock  upon  the  return  and  de- 
livery to  the  company  of  the  original  certificates — they  thus  re- 
ceiving four  shares  of  the  increased  capital  stock  for  one  of  the 
original  shares  returned.  The  other  4,000  shares  were  retained 
by  the  company.  The  land  purchased  was  subject  to  three  mort- 
gages, of  which  the  plaintiff  held  the  third;  and  the  agreement 
was  that,  under  the  first  mortgage,  a  sale  should  be  made  of  the 
property,  and  that  mortgages  for  a  like  amount  should  be  given 
to  the  parties  according  to  their  several  and  respective  amounts, 
and  in  their  respective  positions  and  priorities. 

The  plaintiff  was  to  be  placed  by  the  company,  after  the  release 
of  his  mortgage,  in  the  same  position.  Accordingly,  he  made  a 
deed  to  it  of  all  his  interest  and  title  under  the  mortgage  held  by 
him,  the  trustee  joining  with  him,  in  which  deed  the  agreement 
was  recited.  The  company  thereupon  gave  him  its  mortgage 
upon  the  same  and  other  property,  which  was  payable  in  install- 
ments. The  plaintiff  also  received  at  the  same  time  an  accepted 
draft  of  Howes'  on  the  company  for  $1,000.  When  the  first  in- 
stallment on  the  mortgage  became  due,  the  company  being  un- 
able to  pay  it.  he  took  its  draft  for  the  amount,  $3,000,  payable 
in  December  following.  It  is  upon  these  drafts  that  the  judgment 
was  recovered  in  the  Court  of  Common  Pleas  of  Philadelphia, 
which  is  the  foundation  of  the  present  suit.  It  is  in  evidence  that 
the  plaintiff  was  fully  aware,  at  the  time,  of  the  increase  in  the 
stock  of  the  company,  and  of  its  object.  Six  months  afterwards 
the  increase  was  canceled,  the  outstanding  shares  were  called  in, 
and  the  capital  stock  reduced  to  its  original  limit  of  $100,000. 
Nothing  was  done  after  the  increase  to  enlarge  the  liabilities  of 
the  company.  The  draft  of  Howes  was  passed  to  the  plaintiff 
and  received  by  him  at  the  time  the  agreement  was  carried  out 
upon  which  the  increase  of  the  stock  was  made,  and  the  draft  for 
$3,000  was  for  an  installment  upon  the  mortgage  then  executed. 
The  plaintiff  had  placed  no  reliance  upon  the  supposed  paid-up 
capital  of  the  company  on  the  increased  shares,  and  therefore  has 
no  cause  of  complaint  by  reason  of  their  subsequent  recall.  Had 
a  new  indebtedness  been  created  by  the  company  after  the  issue 
of  the  stock  and  before  its  recall,  a  different  question  would  have 
arisen.  The  creditor  in  that  case,  relying  on  the  faith  of  the  stock 
being  fully  paid,  might  have  insisted  upon  its  full  payment.  But 
no  such  new  indebtedness  was  created,  and  we  think,  therefore, 
that  the  stockholders  cannot  be  called  upon,  at  the  suit  of  the 
plaintiff,  to  pay  in  the  amount  of  the  stock,  which,  though  issued, 
was  soon  afterwards  recalled  and  canceled. 

Judgment   affirmed.^ 

'See,  also,  State  Trust  Co.  v.  Turner,  111  Iowa  664,  82  N.  W.  1029, 
53  L.  R.  A.  136,  for  able  discussion  of  the  "true-value  rule"  and  the 
"good-faith  rule."  Compare  Kathbone  v.  Ayer,  121  App.  Div.  (N.  Y.) 
355,  105  N.  Y.  S.  1041,  revd.  on  dissenting  opinion,  196  N.  Y.  503.— Ed. 


SOUTHWORTH    V.    MORGAN.  369 

SOUTHWORTH  v.   MORGAN. 
1912.     205  N.  Y.  293,  98  N.  E.  490. 
Issue  of  Shares  for  Less  Than  Par. 

COLLIN,  J. — The  plaintiff,  trustee  of  the  bankrupt  corpora- 
tion, Remington  Automobile  &  Motor  Company,  seeks  to  recover 
from  the  defendant  a  sum  unpaid,  upon  a  subscription  by  the 
defendant  for  two  shares  of  the  capital  stock  of  the  corporation. 

The  trial  court  found  as  facts :  The  bankrupt  was  organized 
in  1900  under  the  laws  of  New  Jersey.  Its  authorized  capital 
stock  was  $250,000,  divided  into  2,500  shares  of  the  par  value  of 
$100  each.  Soon  after  its  incorporation,  the  board  of  directors 
adopted  a  resolution  as  follows :  ''Resolved,  that  for  the  purpose 
of  securing  a  local  interest  in  the  Remington  Automobile  &  Motor 
Company  on  the  part  of  the  citizens  of  Ilion  (N.  Y.)  that  200 
shares  of  the  stock  be  issued,  to  be  sold  at  $25  per  share,  and 
that  the  proceeds  of  such  sale  be  placed  in  the  treasury,  to  be 
used  for  regular  expenses."  Thereafter,  in  pursuance  of  the 
resolution,  the  general  manager  and  secretary  of  the  corporation 
presented  to  the  defendant  a  writing,  which  contained  the  agree- 
ments that  the  plant  of  the  corporation  was  to  be  located  and  its 
business  to  be  carried  on  at  Ilion,  and  that  the  defendant  would 
purchase  two  nonassessable  shares  of  the  capital  stock  of  the  cor- 
poration at  $25  for  each  share  and  no  more  would  ever  have  to 
be  paid  upon  them.  The  defendant  signed  the  agreement  and 
purchased  the  two  shares  of  stock  upon  the  distinct  understanding 
and  agreement  made  between  the  defendant  and  the  general  man- 
ager and  secretary  of  the  corporation  that  $25  per  share  fully 
paid  for  the  stock.  He  paid  $50  for  the  two  shares  of  stock  at 
the  time  he  received  them.  The  corporation  located  its  plant  at 
Utica,  N.  Y.,  and  not  at  Ilion.  In  December,  1902,  the  com- 
pany was  adjudged  a  bankrupt,  and  in  April,  1906,  the  United 
States  District  Court  granted  an  order  directing  a  call  or  assess- 
ment upon  the  defendant  and  others  of  $75  per  share  to  meet 
the  deficiency  in  the  assets  of  said  corporation  to  meet  the  obli- 
gations of  its  creditors,  said  assessments  to  be  paid  on  or  before 
July  I,  1906,  and  the  defendant  was  duly  served  with  a  copy  of 
said  order.  The  court  found  as  a  conclusion  of  law  that  the 
plaintiff  was  entitled  to  recover  the  sum  of  $150,  a  conclusion 
which  the  facts  found  do  not  support. 

The  liability  of  the  defendant  is  to  be  determined  by  the  law 
of  the  state  of  New  Jersey.  That  state,  through  its  laws,  gave 
the  corporation  its  existence,  powers,  liabilities,  and  the  limits 
within  which  it  was  free  to  act,  and  a  citizen  of  this  state,  who 
became  a  shareholder  in  it,  entered  into  contract  relations,  the 
extent  and  obligation  of  which  depended  upon  the  laws,  in  so  far 
as  they  do  not  violate  a  statute  or  the  settled  public  policy  of  this 
state.     Lowry  v.   Inman,  46  N.  Y.   119;  Hancock  National   Bank 

2A — Private  Corp. 


370  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

V.   Ellis,    i66  Mass.  414,  44   N.   E.   349,   55   Am.    St.   Rep.   414; 
Mol-son's  Bank  v.   Boardman,  47  Hun,   135. 

The  relevant  laws  of  New  Jersey  are  not  disclosed  or  laid  be- 
fore us  by  the  printed  record;  nor  do  the  findings  make  known 
the  provisions  of  the  charter  of  the  bankrupt  other  than  that 
stated  relating  to  the  authorized  capital  stock.  We  are  confined 
to  the  case  as  the  record  presents  it.  The  laws  of  other  states 
are  facts  which  must  be  alleged  and  proved  and  of  which  we 
cannot  take  judicial  notice  either  in  their  language  or  their  inter- 
pretation. Genet  v.  Del.  &  Hud.  Canal  Co.,  163  N.  Y.  173,  177, 
S7  N.  E.  297;  Hancock  National  Bank  v.  Ellis,  166  Mass.  414, 
44  N.  E.  345,   55  Am.   St.  Rep.  414. 

In  the  absence  of  those  facts,  we  must  presume  that  the  com- 
mon law  of  New  Jersey  is  the  same  as  the  common  law  of  New 
York.     Ruse  v.  Mut.  Benefit  Life  Ins.  Co.,  23  N.  Y.  516,  522. 

It  is  urged  by  the  respondent,  at  this  point,  that  the  order  of 
the  United  States  District  Court  directing  the  assessment  of  the 
shares  of  the  defendant  conclusively  determined  the  validity  and 
the  amount  of  the  assessment.     It  is  true  that  the  regularity  and 
validity  of  the  proceeding  in  that  court  and  its  conclusions  cannot 
be  attacked  in  this  action;  but  the  existence  or  nonexistence  of 
an  obligation  on  the  part  of  the  defendant  to  pay  the  assessment 
was  not  within  the  subject-matter  of  which  that  court  took  juris- 
diction.    To   enable   the  plaintiff   to   enforce   the   liability^  of   the 
delinquent  shareholders  to  the  extent  only  which  the  deficiency  in 
the  corporate  assets  required  and  to  effect  parity  of  contribution 
between  them,  it  was  necessary  that  an  account  of  the  assets  and 
debts,  of  the  entire  amount  of  the  capital  remaining  unpaid  upon 
the  issued  shares,  and  the  part  of  the   face  value  of  his  shares 
unpaid  by  each  stockholder,  should  be  taken,  and  the  aggregate 
assessment  required  equitably  rated  by  the  court,  and  it  is  upon 
those  issues  that  its  order  is  beyond  attack  in  this  action.     Great 
Western  Telegraph  Co.  v.  Purdy,  162  U.  S.  329,  16  Sup.  Ct.  810, 
40  L.  Ed.  986;  Howarth  v.  Angle,  162  N.  Y.  179,  56  N.  E.  489, 
47  L.  R.  A.  725.     In  the  former  case  the  court,  speaking  of  an 
analogous  order  of  a  court  of  Illinois,  said:     "But  the  order  was 
not,  and  did  not  purport  to  be,  a  judgment  against  anyone.     It 
did   not   undertake   to   determine   the   question    whether   any   par- 
ticular stockholder  was  or  was  not  liable  in  any  amount.     It  did 
not  merge  the  cause  of  action  of  the  company  against  any  stock- 
holder  on   his   contract   of   subscription,   nor   deprive   him   of   the 
right,  when  sued  for  an  assessment,  to  rely  on  any  defense  which 
he  might  have  to  an  action  upon  that  contract."     162  U.  S.,  page 
337,  16  Sup.  Ct.,  page  813,  40  L.  Ed.  986.     The  respondent  does 
not   contend    that    the    charter    provision    dividing    the    authorized 
capital  stock  into  shares  "of  the  par  value  of  $100  each"  prohib- 
ited the  creation  of  an  actual  share  or  interest  upon  a  considera- 
tion less  than  $100,  or  secure  to  the  creditors  or  their  represen- 
tative the  right  of  collecting  upon  each  share,  as  the  discharge  of 


SOUTHWORTH    V.    MORGAN.  37I 

the  corporate  debts  demands,  the  difference  between  the  consid- 
eration and  $100. 

Inasmuch  as  no  statute  of  the  state  of  New  Jersey,  nor  pro- 
vision of  the  charter  of  the  corporation  relative  to  the  HabiHty  of 
the  defendant,  was  proven,  we  turn  to  the  common  law,  remark- 
ing parenthetically,  however,  that  we  have  not  been  referred  to 
and  have  not  found  any  domestic  statute  which  prescribes,  as  a 
condition  to  the  exercise  here  of  the  rights  derived  from  the 
state  of  New  Jersey  that  the  shareholders  shall  be  liable  to  the 
creditors  or  their  representative  up  to  the  nominal  value  of  their 
stock,  and  there  is  therefore  no  statutory,  as  there  is  no  charter, 
prohibition  against  the  issuance  of  the  shares  of  the  capital  stock 
for  less  than  their  par  value  as  named  in  the  charter,  and  no 
statutory  mandate  that  the  shares  shall  be  deemed  issued  and 
held  subject  to  the  payment  of  such  value.  Nor  do  the  principles 
of  the  common  law  of  this  state  work  such  results.  In  Christen- 
sen  V.  Eno,  io6  N.  Y.  97,  102,  12  N.  E.  648,  650  (60  Am.  Rep. 
429),  the  action  was  brought  by  a  judgment  creditor  of  an  in- 
solvent corporation  organized  under  the  laws  of  Illinois  to  recover 
40  per  cent,  of  the  authorized  par  value  of  $100  each  of  25 
shares  of  the  stock  of  the  company  issued  to  but  unsubscribed 
for  by  the  defendant,  upon  which  the  40  per  cent,  was  not  paid, 
but,  as  a  gratuity,  was  credited  as  paid,  when  the  stock  was 
issued.  Judge  Andrews,  writing  for  this  court,  which  reversed 
the  judgment  in  favor  of  the  plaintiff,  said  (citing  authorities)  : 
"But  the  liability  of  a  shareholder  to  pay  for  stock  does  not  arise 
out  of  his  relation,  but  depends  upon  his  contract,  express  or 
implied,  or  upon  some  statute,  and  in  the  absence  of  either  of 
these  grounds  of  liability,  we  do  not  perceive  how  a  person  to 
whom  shares  have  been  issued  as  a  gratuity  has,  by  accepting 
them,  committed  any  wrong  upon  creditors,  or  made  himself 
liable  to  pay  the  nominal  face  of  the  shares  as  upon  a  sub- 
scription or  contract."  The  principles  which  determined  our 
judgment  in  that  case  were  reaffirmed  in  Christensen  v.  Colby, 
no  N.  Y.  660.  18  N.  E.  480. 

In  the  case  at  bar,  no  statute  supports  the  alleged  liability  of 
the. defendant,  and  the  express  agreement  between  the  corporation 
and  the  defendant  was  that  the  defendant  should  pay  25  per  cent, 
of  the  nominal  value  of  the  shares  and  no  more.  The  respondent 
contends,  however,  and  therein  he  has  been  successful  in  the 
courts  below,  that  the  creditors  of  the  corporation  represented  by 
the  plaintiff  have  the  right  to  compel  the  payment  of  the  impaid 
75  per  cent,  because  the  capital  stock  is  a  trust  fund  for  the 
security  of  the  creditors,  and  that  a  liability  in  their  favor  to  the 
extent  of  the  unpaid  part  of  the  nominal  value  of  the  actual 
shares  exists  and  can  be  enforced.  Such  contention  availed  the 
plaintiff  in  the  Christensen  Case  until  it  reached  this  court,  the 
General  Term  saying  therein  that  the  practical  effect  of  the  trans- 
action was  to  take  out  of  the  assets,  to  which  the  creditors  were 


372  THE    COMMON-LAW    LIABILITY    OF    STOCKHOLDERS. 

entitled,  the  40  per  cent,  indorsed  as  paid  upon  the  stock,  when 
in  fact  it  was  not  paid.  It  is  strenuously  urged  that  this  case  is 
not  controlled  by  the  principles  which  decided  the  Christensen 
Case,  for  the  reason  that  the  defendant  subscribed  for  the  two 
shares  of  the  capital  stock,  while  in  the  Christensen  Case  the 
stock  certificate  was  merely  issued  to  and  accepted  by  the  de- 
fendant. The  subscription,  as  expressed  in  the  agreement  between 
the  defendant  and  the  corporation,  has  been  completely  fulfilled 
by  the  payment  in  full  of  the  sum  it  bound  him  to  contribute  and 
therewith  his  liability  to  the  corporation  or  the  creditors  termi- 
nated, unless  there  issued  from  the  trust  fund  doctrine,  through 
implication,  a  contract  which,  in  the  paramountcy  given  it  by  the 
fact  that  it  was  the  irresistible  product  of  the  law,  nullified  the 
expressed  stipulation  that  $25  was  the  whole  sum  to  be  paid  upon 
each  share,  and  substituted  in  its  place  the  requirement  that,  as 
to  the  creditors,  there  should  be  paid  $100,  or  so  much  thereof 
as  the  satisfaction  of  their  demands  made  necessary.  That  doc- 
trine has  not  such  potency.  Its  peculiar  vigor  is  that,  contrary 
to  the  common  law  of  England,  it  secures  to  the  creditors  of 
insolvent  corporations  or  their  representatives  the  right  of  en- 
forcing subscriptions  for  shares  of  which  the  corporation  has 
deprived  itself  by  release  or  defeasance.  It  declares  that  the  cap- 
ital stock  of  a  corporation  is  a  substitute  for  the  personal  lia- 
bility which  subsists  in  individual  or  partnership  undertakings, 
and  is  a  fund  set  apart  as  a  security  for  the  payment  of  the  cor- 
porate debts.  The  capital  or  capital  stock  which  it  thus  segre- 
gates is  not  the  capital  stock  authorized  or  named  in  the  charter 
of  the  corporation.  If  it  were,  the  members  would  be  bound  by 
the  doctrine  to  contribute  on  account  of  it  the  sum  within  its 
named  value  needed  to  pay  the  debts  of  the  insolvent  corporation. 
The  statement  in  the  charter  does  not  create  a  security  for  the 
creditors.  It  creates  authorized  or  potential  capital  stock  and 
shares  which,  transferred  into  actual  shares  through  the  acquisi- 
tion of  subscribing  members  and  their  payments,  produces  the 
money  or  property  which,  put  into  a  single  corporate  fund,  is 
the  actual  capital  or  capital  stock  on  which  the  business  is  under- 
taken and  the  assets  or  fund  contemplated  by  the  trust  fund 
doctrine  which  the  directors  or  stockholders  may  not  lawfully 
diminish  by  appropriating  or  squandering  it  or  giving  it  away. 
And  as  there  is  not  a  fund  or  security  in  the  nominal  or  potential 
shares,  there  is  none  in  the  excess  of  the  nominal  value  over  the 
subscribed  value  of  the  shares.  The  subscription  agreements,  as 
they  are  enforceable  through  their  express  provisions  or  implica- 
tion or  statutory  conditions,  are  the  sources  and  the  measure  of 
the  duty  of  the  subscribers.  Christensen  v.  Eno,  106  N.  Y.  97, 
12  N.  E.  648,  60  Am.  Rep.  429;  Burrall  v.  Bushwick  Railroad 
Co.,  75  N.  Y.  211.  The  doctrine  further  declares  that  unpaid 
subscriptions  are  a  part  of  the  capital  and  that  a  subscriber  can- 
not be  discharged  to  the  injury  of  creditors  by  arrangement  or 


SOUTHWORTH    V.    MORGAN.  373 

device  to  which  creditors  do  not  give  their  assent  and  by  which 
he  is  to  pay  less  than  his  subscription,  Stoddard  v.  Lum,  159 
N.Y.  265,  53  N.  E.  1108,45  L.  R.  A.  551,  70  Am.  St.  Rep,  541; 
Ward  V.  City  Trust  Co.,  192  N.  Y,  61,  84  N,  E,  585;  Hazard  v. 
Wight,  201  N.  Y,  399,  94  N,  E.  855.  The  doctrine  does  not 
create  or  nulUfy  subscriptions.  It  lays  hold  of  the  assets  of  an 
insolvent  corporation,  and  in  doing  that  it  compels  subscribers  to 
fulfill  their  legal  obligations  and  perform  their  legal  duties;  but 
it  does  not  beget  those  duties  or  obligations ;  it  does  not  make 
unlawful  or  invalid  a  subscription  which,  apart  from  it,  was 
valid  and  lawful.  The  question  with  it  is :  Has  the  subscriber 
fully  performed  the  subscription  agreement  as  it  in  fact  and  in 
law  exists?  And  an  affirmative  finding  renders  it  inapplicable 
and  inoperative.  In  the  case  at  bar  there  were  not  statutory  con- 
ditions upon  which  the  shares  might  be  owned.  The  agreement 
between  the  defendant  and  the  corporation  expressed  with  com- 
pleteness the  obligations  and  liability  of  the  defendant  for  his 
shares.  He  has  fulfilled  the  obligation  and  thereby  destroyed  the 
liability.  The  trust  fund  doctrine  is  inapplicable,  and  the  find- 
ings of  fact  do  not  constitute  a  cause  of  action. 

We  have  not  considered  or  determined  either  the  manner  or 
the  extent  in  which  a  statute  of  New  Jersey,  inimical  to  the  ex- 
press agreement  of  the  corporation  and  the  defendant,  would 
through  implication  afifect  it,  or  the  effect  of  the  statement  of 
the  corporation  that  it  would  locate  its  plant  and  carry  on  its 
business  at  Ilion,  because  the  record  submitted  to  us  does  not 
present  those  questions. 

The  judgment  should  be  reversed,  and  a  new  trial  granted; 
costs  to  abide  the  event. 

Haight,  Vann,  Willard  Bartlett,  Hiscock,  and  Chase,  JJ.,  concur. 

CULLEN,  C.  J. — I  concur  on  the  sole  ground  that,  as  shown 
in  the  opinion  of  Collin,  J.,  the  question  involved  in  the  appeal 
is  settled  by  the  authority  of  the  previous  decisions  of  this  court. 
Were  it  an  original  one,  I  should  reach  a  contrary  conclusion. 

Judgment   reversed,   etc. 


CHAPTER  XVII. 

THE   CONSTITUTIONAL   AND   STATUTORY   LIABILITY    OF   STOCKHOLDERS. 

FIRST    NATIONAL   BANK   v.    GUSTIN    MINERVA    CON- 
SOLIDATED MINING  CO. 

1890.     42  Minn.  327,  44  N.  W.  198,  6  L.  R.  A.  676,  18  Am.  St. 

510. 

Liability  of  Non-resident  Stockholders. 

MITCHELL,  J.:  This  action  was  brought  upon  a  debt  of  the 
defendant  company,  a  corporation  organized  under  the  laws  of 
Dakota  territory,  and  against  the  other  defendants,  citizens  of 
this  state,  as  stockholders,  to  obtain  judgment  against  the  com- 
pany for  the  amount  of  the  debt,  and  against  the  other  defend- 
ants for  the  respective  amounts  alleged  to  be  due  and  unpaid  on 
the  stock  held  by  them,  so  far  as  necessary  to  satisfy  the  judg- 
ment against  the  corporation.  To  dispose  of  certain  preliminary 
questions  raised  by  the  defendants,  it  may  be  stated  at  the  outset 
that  it  is  elementary  law  that,  where  a  person  becomes  a  stock- 
holder in  a  corporation  organized  under  the  laws  of  a  foreign 
state,  he  must  be  held  to  contract  with  reference  to  all  of  the 
laws  of  the  state  under  which  the  corporation  is  organized  and 
which  enter  into  its  constitution ;  and  the  extent  of  his  individual 
liability  as  a  shareholder  to  the  creditors  of  the  company  must 
be  determined  by  the  laws  of  that  state,  not  because  such  laws 
are  in  force  in  this  state,  but  because  he  has  voluntarily  agreed 
to  the  terms  of  the  company's  constitution.  It  is  equally  clear, 
upon  both  principle  and  authority,  that  this  liability  may  be  en- 
forced by  creditors  wherever  they  can  obtain  jurisdiction  of  the 
necessary  parties.  This  does  not  depend  upon  any  principle  of 
comity,  but  upon  the  right  to  enforce  in  another  jurisdiction  a 
contract  validly  entered  into.  The  remedy,  however,  does  not 
enter  into  the  contract  itself;  and  for  this  reason  the  individual 
liability  of  shareholders  can  only  be  enforced  by  the  remedies 
provided  by  the  laws  of  the  forum.  Hence  the  question  of  the 
liability  of  the  defendant  shareholders  must  be  determined  by  the 
laws  of  Dakota,  and  that  of  remedy  by  the  laws  of  Minnesota. 

That  the  remedy  resorted  to  by  plaintiff  in  this  case  is  a  proper 
one  is  well  settled.  Merchants'  Nat.  Bank  v.  Bailey  Mfg.  Co.,  34 
Minn.  323  (25  N.  W.  Rep.  639).  Upon  the  trial  the  judge  con- 
sidered it  to  be  one  triable  by  the  court,  but,  on  his  own  motion, 
submitted  a  specific  question  of  fact  to  a  jury;  but  subsequently, 
considering  the  verdict   as   immaterial,   he   proceeded   without   re- 

'  374 


FIRST    XATIONAr.    BANK    V.    MINING    CO.  3/5 

gard  to  it,  and  found  the  facts  upon  all  the  issues  in  the  case.  As 
neither  party  claims  anything  from  this  special  finding  of  the 
jury,  and  as  there  is  no  exception  which  raises  the  question 
whether  the  action  was  triable  by  the  court  or  by  a  jury,  the 
whole  case  is  reduced  to  the  single  question  whether  the  conclu- 
sions of  law  are  justified  by  the  findings  of  fact. 

Section  413  of  the  Civil  Code  of  Dakota  provides  that  "each 
stockholder  of  a  corporation  is  individually  and  personally  liable 
for  the  debts  of  the  corporation  to  the  extent  of  the  amount  that 
is  unpaid  upon  the  stock  held  by  him."  This  is  but  declaratory 
of  the  common   law. 

The  findings  of  fact,  so  far  as  here  material,  are,  in  substance, 
as  follows:  Prior  to  November  13,  1886,  there  had  been  organ- 
ized, and  were  at  that  date  in  existence,  under  the  laws  of  Dakota, 
two  mining  corporations,  viz.,  the  Gustin  Belt  Gold  Mining  Com- 
pany, and  the  J^Iinerva  Mining  Company,  of  the  latter  of  which 
the  plaintiff,  a  national  banking  association  of  Deadwood,  Dak., 
was  a  creditor.  On  the  date  named  the  defendant  corporation 
was  organized  for  the  purpose  and  with  intention  of  consolidat- 
ing the  other  two  companies,  acquiring  their  property,  and  with 
the  property  so  acquired  carrying  on  a  general  mining  business. 
"At  the  time  of  the  organization  of  the  defendant  company,  and 
as  the  scheme  on  which  the  same  was  based,  it  was  agreed  by  the 
parties  so  incorporating,  and  by  those  representing  and  having 
authority  to  act  for  the  two  existing  companies,  that  all  the 
mines  and  mining  property  of  such  two  corporations  should, 
upon  its  organization,  be  transferred  and  conveyed  to  the  new, 
or  defendant  company,  and  constitute  its  entire  capital  stock 
and  resources  for  the  prosecution  of  its  enterprise,  and  be  repre- 
sented in  such  organization  by  a  nominal  capital  stock  of  $2,500,- 
000,  divided  into  250,000  shares,  of  $10  each,  which  should  all 
be  deemed  and  held  as  represented  by  the  properties  so  conveyed 
to  it;  that  50,000  of  said  shares  should  be  issued  to  the  former 
shareholders  of  each  of  the  two  old  companies,  and  the  remaining 
150,000  shares  belong  to  and  constitute  the  working  capital  of 
the  new  corporation,  and  be  sold  under  its  authority,  and  on  such 
terms  as  it  should  direct ;  and  the  proceeds  of  such  sales  consti- 
tute a  fund  to  pay  ofif  the  debts  on  the  properties,  and  develop 
the  mines  thereon,  and  be  used  generally  in  the  prosecution  of  the 
business  of  the  new  corporation,  for  the  benefit  of  all  its  stock- 
holders. That  it  was  never  expected  or  intended  by  such  corpora- 
tion, or  by  those  to  whom  its  stock  was  issued,  that  any  sub- 
scription to  the  capital  stock  of  the  new  company  should  ever  be 
made,  or  that  any  capital  stock  should  ever  be  taken,  or  any 
capital  subscribed  for  or  paid  in,  except  by  conveyance  to  it  of  the 
mining  properties  referred  to,  and  the  sale  of  the  stock  reserved 
for  its  working  capital,  in  open  market,  for  such  sum  as  could  be 
obtained  therefor."  This  scheme  was  carried  into  effect  by  the 
conveyance  to  the  new  or  defendant  corporation  of  the  properties 


376  LIABILITY    OF    STOCKHOLDERS. 

of  the  two  old  corporations,  and  the  issue  to  their  stockholders, 
according  to  their  respective  holdings,  of  100,000  shares  of  the 
stock  of  the  new  company  (called  in  the  findings  "Old  Company 
Stock")  as  paid-up  stock,  and  by  placing  the  remaining  150,000 
in  charge  of  the  board  of  directors,  to  be  by  them  sold  in  the  open 
market  for  such  price  per  share  (not  less  than  50  cents)  as  could 
be  obtained  therefor.  The  mining  properties  of  the  two  old  com- 
panies conveyed  to  the  new  company  were  not  worth  to  exceed 
$50,000  cost,  and  were  at  the  time  of  this  scheme  of  consolidation 
considered  and  estimated  as  of  the  aggregate  value  of  $100,000. 
The  new  and  defendant  company  assumed  payment  of  the  indebt- 
edness of  the  ]\Iinerva  Mining  Company  to  the  plaintiff,  which 
consented  to  a  novation  of  its  debt,  accepting  the  notes  of  the  de- 
fendant company  in  place  of  those  of  the  old  Minerva  Company. 
This  is  the  claim  upon  which  this  action  is  brought.  The  court 
also  finds  "that  the  payees  in  said  notes  named,  and  the  general 
managing  officer  of  the  plaintiff,  well  knew,  at  the  time  of  the 
execution  of  said  notes  and  of  their  indorsement  and  delivery  to 
the  plaintiff,  all  the  facts  hereinbefore  stated,  relating  to  the 
organization  of  the  defendant  corporation  and  the  understand- 
ing and  plan  of  its  organization,  and  so  dealt  with  the  defendant 
knowing  such  matters,  and  were  parties  to  and  interested  in  the 
original  scheme  of  the  incorporation  of  the  defendant  company  as 
in  the  findings  set  forth."  This  must  be  construed  as  meaning 
that  the  "general  managing  officer"  referred  to  is  the  person  who 
transacted  the  business  with  the  defendant  company  in  taking 
these  notes,  and  of  the  benefit  of  whose  action  in  that  regard  the 
plaintiff  has  availed  itself.  Notice  to  him  must  be  deemed  notice 
to  the  plaintiff. 

Returning,  now,  to  the  subsequent  management  of  the  affairs 
of  the  defendant  company,  the  board  of  directors,  pursuant  to  the 
scheme  of  organization,  offered  for  sale  in  the  open  market  the 
150,000  shares  remaining  in  the  treasury,  as  fully  paid-up  stock, 
and  some  of  it  was  bought  as  such  by  the  other  defendants  in 
good  faith,  for  a  price  exceeding  its  fair  market  value  (but  not 
exceeding  one  dollar  per  share),  believing  it  to  be  fully  paid-up 
stock.  This  is  called  in  the  findings  "Treasury^  Stock."  _  The 
holders  of  the  old  company  stock  also  placed  their  stock  in  the 
market,  some  of  which  the  defendants  also  bought,  under  like  cir- 
cumstances and  in  the  same  belief.  In  March,  1887,  the  board  of 
directors,  pursuant  to  a  resolution  adopted  by  them,  distributed 
pro  rata  among  the  individual  shareholders  all  the  stock  remain- 
ing unsold  in  the  treasury.  Of  this  the  individual  defendants  re- 
ceived their  respective  shares,  for  which  they  paid  nothing.  This 
is  called  in  the  findings  "Pro  rate  Stock."  The  court  also  finds 
that  none  of  such  defendants  ever  contracted,  promised,  or  in  any 
manner  agreed,  or  intended  to  contract,  promise,  or  agree,  to  pay, 
on  account  of  such  stock,  any  other  or  different  or  greater  sum  or 
consideration,  unless  the  law  would  impose  or  imply  such  prom- 


FIRST    NATIONAL   BANK   V.    MINING    CO.  377 

ise,  contract,  or  agreement  from  the  foregoing  facts.  The  hold- 
ings of  the  defendants  consist,  in  part,  of  old  company  stock,  in 
part  of  treasury  stock,  and  in  part  of  pro  rate  stock. 

The  contention  of  the  plaintiff  is  that  the  defendant  sharehold- 
ers are  individually  liable,  as  for  unpaid  stock  subscriptions,  for 
amounts  equal  to  the  amount  of  their  stock,  less  the  value  of 
what  they  have  actually  paid  therefor,  viz.,  nine  dollars  per  share 
on  the  old  company  and  treasury  stock,  for  which  they  paid  in 
value  only  one  dollar  per  share,  and  ten  dollars  per  share  on  the 
pro  rate  stock,  for  which  they  paid  nothing.  If  these  stockhold- 
ers were  indebted  to  the  corporation  for  unpaid  instalments  on 
stock,  this  debt  would  be  an  asset  of  the  corporation  which,  in 
case  it  became  insolvent,  any  creditor  might  always  enforce  for 
the  purpose  of  satisfying  his  claim.  But  it  is  very  clear  from  the 
facts  that  the  defendant  company  has  no  claim  against  the  de- 
fendant stockholders.  They  owe  it  nothing.  As  between  them 
and  it,  the  arrangement  by  which  this  stock  was  issued  and  sold, 
or  given  away,  as  fully  paid  stock,  is  entirely  valid.  But  the 
plaintiff  bases  its  claim  upon  the  familiar  doctrine  that  the  capi- 
tal stock  of  a  corporation  is  a  trust  fund  for  the  benefit  of  its 
creditors,  and  that,  if  shares  are  not  in  fact  paid  up,  an  arrange- 
ment between  the  corporation  and  the  shareholders  that  they 
shall  be  deemed  paid  up,  although  valid  between  the  company 
and  the  stockholder,  will  be  ineffectual  as  to  creditors,  and  that 
equity  will  hold  the  shareholder  liable  for  the  amount  not  in  fact 
paid  on  his  stock,  to  the  extent  necessary  to  satisfy  the  demands 
of  creditors.  We  waive  consideration  of  the  question  (which 
may,  at  least,  admit  of  doubt)  whether  plaintiff's  complaint  is 
sufficient  to  entitle  it  to  such  relief.  See  Phelan  v.  Hazard,  5 
Dill.  45;  Cook,  Stocks,   §  47;  Scovill  v.  Thayer,   105  U.   S.   143. 

The  general  proposition  advanced  by  plaintiff  cannot  be  contro- 
verted, but  the  principle  upon  which  this  trust  in  favor  of  credit- 
ors rest,  and  is  administered  must  not  be  overlooked.  The  whole 
doctrine  that  the  capital  stock  of  corporations  is  a  trust  fund  for 
the  payment  of  creditors  rests  upon  the  equitable  consideration 
that  the  distribution  of  the  capital  among  stockholders  without 
making  adequate  provision  for  the  payment  of  debts,  or  the  issue 
of  fictitiously  paid-up  stock,  is  a  fraud  upon  creditors  who  con- 
tract with  the  corporation  in  reliance  upon  its  capital  remaining 
intact,  or  in  reliance  upon  the  professed  capital  having  been  in 
fact  paid  up  in  full.  But  when  the  reason  for  the  rule  does  not 
exist  the  rule  itself  ceases  to  apply.  This  trust  does  not  arise  ab- 
solutely in  every  case,  in  favor  of  every  and  any  creditor.  It  is 
not  true,  and  no  case  can  be  found  which  holds,  that  it  is  in  the 
power  of  a  creditor  in  every  and  all  cases,  as  a  matter  of  right,  to 
institute  an  inquiry  as  to  the  value  or  amount  of  the  considera- 
tion given  for  stock  issued  as  fully  paid  up,  any  more  than  that  it 
would  be  his  right,  in  any  and  every  case,  to  inquire  into  the  dis- 
tribution of  the  capital  among  the  shareholders.     It  is  only  those 


3/8  LIABILITY    OF    STOCKHOLDERS. 

creditors  who  can  fairly  allege  that  they  have  relied,  or  whom 
the  law  presumes  to  have  relied,  upon  the  amount  of  capital  stock 
of  the  company,  who  have  a  right  to  make  such  inquiry,  or  in 
whose  favor  equity  will  impress  a  trust  upon  the  subscription  to 
the  stock,  and  set  aside  a  fictitious  arrangement  for  its  payment. 
For  example,  to  distribute  the  capital  among  the  shareholders 
without  provision  for  paying  corporate  debts  would  be  a  fraud 
on  existing  creditors,  as  well  as  on  such  subsequent  creditors  as 
deal  with  the  corporation  in  reliance  upon  the  assumption  that 
its  professed  capital  remains  intact.  An  illustration  of  this  kind 
is  to  be  found  in  the  very  first  case  in  which  what  is  now  called 
the  "American  doctrine"  was  announced  by  Justice  Story.  We 
refer  to  the  case  of  Wood  v.  Dummer,  3  Mason,  308,  where  a 
banking  association  distributed  three-fourths  of  its  capital  among 
its  shareholders  without  providing  for  the  payment  of  bill- 
holders,  and  the  court  impressed  a  trust  in  their  favor  upon  the 
capital  in  the  hands  of  the  shareholders.  So,  again,  where  cor- 
porations have  organized  and  engaged  in  business  with  a  certain 
amount  of  ostensible  and  professed  paid-up  capital,  but  which 
was  not  in  fact  paid  in,  there  are  numerous  cases  in  which  the 
courts  have  set  aside  the  arrangement  by  which  the  stock  was 
called  "paid-up,"  and  impressed  a  trust  upon  the  subscription  of 
the  shareholder  in  favor  of  subsequent  creditors  who  relied  upon, 
or  whom  the  law  would  presume  to  have  relied  upon,  the  apparent 
and  professed  amount  of  capital.  To  this  class  belong  many  of 
the  cases  cited  by  plaintifif,  as,  for  example.  Sawyer  v.  Hoag,  17 
Wall.  610;  Wetherbee  v.  Baker,  35  N.  J.  Eq.  501. 

While  the  courts  have  not  always  had  occasion  to  state  the 
limitations  upon  the  doctrine  that  "the  capital  is  a  trust  fund  for 
the  benefit  of  creditors,"  yet  we  think  that  it  will  be  found  that 
in  every  case  where  they  have  impressed  a  trust  upon  the  sub- 
scription of  the  shareholders,  it  has  been  in  favor  of  creditors  be- 
coming such  afterwards,  and  hence  fairly  to  be  presumed  as  rely- 
ing upon  the  amount  of  capital  which  the  company  was  repre- 
sented as  having.  We  are  referred  to  none,  and  have  found  none, 
where  any  such  trust  has  been  enforced  in  favor  of  creditors  who 
have  dealt  with  the  corporation  with  full  knowledge  of  the  facts. 
The  reason  is  apparent,  for  in  such  cases  no  fraud,  actual  or  con- 
structive, has  been  committed  on  such  creditors.  If  a  corporation 
issue  new  shares  after  the  claim  of  a  creditor  arose,  it  is  clear  that 
the  latter  could  not  have  dealt  with  the  company  on  the  faith  of 
any  capital  represented  by  them.  Whatever  was  contributed  as 
capital  in  respect  of  the  new  shares  was  a  clear  gain  to  the  cred- 
itor's security.  So,  too,  if  a  party  deals  with  a  corporation  with 
full  knowledge  of  the  fact  that  its  nominal  paid-up  capital  has 
not  in  fact  been  paid  for  in  money  or  property  to  the  full  amount 
of  its  par  value,  he  deals  solely  on  the  faith  of  what  has  been 
actually  paid  in,  and  has  no  equitable  right  to  insist  on  the  con- 
tribution of  a  greater  amount  of  capital  by  the  shareholders  than 


UMSTED    V.    15USK1RK.  379 

the  corporation  itself  could  claim  as  part  of  its  assets.  Coit  v. 
Gold  Amalgamating  Co.,  14  Fed.  Rep.  12;  same  case,  119  U.  S. 
343  (7  Sup.  Ct.  Rep.  231).  This  doctrine  with  respect  to  trusts 
has  no  application  to  a  case  where  a  party,  like  the  plaintiff,  was 
cognizant  of  the  whole  arrangement  under  which  the  stock  of  the 
defendant  company  was  issued,  and  of  what  was  paid  or  intended 
to  be  paid  for  it,  and  who  accepted  a  novation  of  its  debt  with 
full  knowledge  of  these  facts,  and  received  as  great  or  greater 
security  for  it  than  it  had  before.  To  hold  otherwise  would 
be  to  perpetrate  a  fraud  on  the  stockholders,  and  not  on  the 
creditors.  .     .  . 

These  views  effectually  dispose  of  the  question  of  the  liability 
of  the  defendants,  at  least  on  account  of  their  old  company  and 
treasury  stock.  We  think  it  also  logically  follows  from  what  we 
have  said  that  the  defendants  are  not  liable  to  the  plaintiff  upon 
their  "pro  rate"  stock  as  for  unpaid  stock  subscriptions.  This 
stock  had  not  been  issued  when  plaintiff's  debt  was  contracted. 
It  could  not  have  dealt  with  the  company  on  the  faith  of  any 
capital  represented  by  these  shares.  In  fact,  it  knew  that  no  such 
capital  had  been  paid  in,  unless  the  mining  properties  of  the  two 
old  companies  can  be  considered  as  represented  in  part  by  them; 
and  the  value  of  these  properties  remained  the  same,  and  they 
were  equally  available  to  creditors,  whether  represented  by  100,- 
000  shares  or  250,000  shares  of  stock.  Under  such  circumstances, 
the  plaintiff  has  no  equitable  right  to  insist  on  the  contribution 
of  a  greater  amount  of  capital  by  the  holders  of  these  shares  than 
the  corporation  itself  could  insist  on.    2  Mor.  Priv.  Corp.,  §§  832, 

833- 

Judgment   affirmed. 


UMSTED  V.  BUSKIRK. 

1866.     17  Ohio  St.   113. 

Enforcement   of  Statutory   Liabilities — Parties. 

WHITE,  J.:  The  original  petition  in  this  case  is  in  the  nature 
of  a  bill  in  equity,  and  if  filed  by  a  judgment  creditor  of  an 
insolvent  corporation,  to  obtain  satisfaction  of  his  judgment,  by 
the  enforcement  of  the  statutory  liability  of  the  several  stock- 
holders, and  of  the  liability  of  one  of  them  on  an  unpaid  stock 
subscription. 

No  objection  is  made  on  the  ground  of  a  defect  of  parties,  and 
for  aught  that  appears  in  the  record,  the  plaintiff  is  the  only 
creditor,  and  the  defendants  the  only  stockholders  of  the  cor- 
poration. 

The  only  ground  assigned  for  the  demurrer  is.  that  the  petition 
does  not  contain   facts  sufficient  to  constitute  a  cause  of  action. 


380  LIABILITY    OF    STOCKHOLDERS. 

The  corporation  of  which  the  defendants  are  stockholders,  was 
organized  under  the  act  of  May  i,  1852;  and  the  HabiHty  of  the 
stockholders  in  question,  is  provided  for  in  section  78,  which,  as 
originally  passed,  is  as  follows : 

"The  stockholders  of  any  railroad,  turnpike,  or  plank-road, 
magnetic  telegraph,  or  bridge  company,  shall  be  deemed  and  held 
liable  to  an  amount  equal  to  their  capital  stock  subscribed,  in 
addition  to  said  stock,  for  the  purpose  of  securing  the  creditors  of 
such  company."     50  Ohio  L.  296;  3  Curwen's   Stat.    1897. 

The  subsequent  amendment  of  April  17,  1854,  did  not  alter  the 
section  in  respect  to  railroad  companies,  i  S.  &  C.  Stat.  310;  4 
Curwen's  Stat.  2582. 

The  counsel  of  the  defendant  in  error  claims  to  support  the 
judgment  below  on  the  ground  that  it  was  not  the  intention  of 
the  legislature  "to  make  the  stockholders  in  railroad  companies 
individually  liable  to  the  creditors  of  the  company;"  but  that  as 
stockholders  they  are  subject  to  be  assessed  pro  rata  by  the  cor- 
poration to  the  extent  of  this  statutory  liability. 

This  claim  was  made  in  Wright  et  al.  v.  McCormack  et  al. 
(decided  at  the  present  term),  and  overruled.  It  was  held  in  that 
case  that  this  liability  of  stockholders  was  a  security  provided 
by  law  for  the  exclusive  benefit  of  the  creditors,  over  which  the 
corporate  authorities  had  no  control. 

If  the  corporation  has  the  right  to  enforce  this  liability  by  as- 
sessments, it  can  exhaust  it  to  discharge  a  present  indebtedness, 
and  continue  in  business  with  no  other  security  to  its  future  cred- 
itors than  its  corporate  liability. 

This  would  neither  be  in  accordance  with  the  design  of  the  con- 
stitutional provision,  nor  of  the  statute.  The  intention,  doubt- 
less, was  to  provide  an  ultimate  security  to  which  the  creditors 
might   resort   on   the    failure   and   insolvency   of   the   corporation. 

Nor  will  it  follow,  as  counsel  suppose,  from  the  denial  of  the 
right  to  the  corporation  of  enforcing  this  liability,  that  it  may  be 
enforced  against  part  of  the  stockholders,  at  the  election  of  the 
creditor,  without  the  right  on  their  part  to  call  on  their  co-stock- 
holders for  contribution. 

The  liability  on  the  part  of  the  stockholders  is  several  in  its 
nature,  but  the  right  arising  out  of  this  liability  is  intended  for 
the  common  and  equal  benefit  of  all  the  creditors.  The  suit  of  a 
creditor  under  this  statute  should,  in  our  opinion,  be  for  the  bene- 
fit of  all  the  creditors ;  and  the  stockholders,  whose  liability 
is  sought  to  be  enforced,  have  the  right  to  insist  on  their  co-stock- 
holders being  made  parties  for  the  purposes  of  a  general  account, 
and  to  enforce  from  them  contribution  in  proportion  to  their 
shares  of  stock. 

The  right  of  contribution  grows  out  of  the  organic  relation  ex- 
isting among  the  stockholders,  as  between  them  and  the  credit- 
ors,  each  stockholder  is   severally  liable  to   all   the  creditors ;   as 


HUNTINGTON    V.    ATTRILL.  381 

between  themselves,  each  stockholder  is  bound  to  pay  in  propor- 
tion to  his  stock. 

The  corporation  ought  to  have  been  made  a  party,  but  the 
omission  was  not  made  an  objection,  and  the  demurrer  was  sus- 
tained, and  the  action  dismissed,  on  the  sole  ground  of  the  peti- 
tion not  showing  a  cause  of  action  against  the  defendants. 

The  omission  to  make  the  corporation  a  party  is,  therefore,  no 
objection  to  the  reversal  of  the  judgment. 

The  judgment  sustaining  the  demurrer  and  dismissing  the  ac- 
tion is  reversed,  and  the  cause  remanded  for  further  proceedings. 


HUNTINGTON  v.  ATTRILL. 

1892.     146  U.  S.  657,  36  L.  ed.  1 123,  13  Sup.  Ct.  224. 

Enforcement  of  Penal  Liability. 

MR.  JUSTICE  GRAY :  This  was  a  bill  in  equity,  filed  March 
21,  1888,  in  the  circuit  court  of  Baltimore  city,  by  Collis  P. 
Huntington,  a  resident  of  New  York,  against  the  Equitable  Gas 
Light  Company  of  Baltimore,  a  corporation  of  Maryland,  and 
against  Henry  Y.  Attrill,  his  wife  and  three  daughters,  all  resi- 
dents of  Canada,  to  set  aside  a  transfer  of  stock  in  that  company, 
made  by  him  for  their  benefit  and  in  fraud  of  his  creditors,  and 
to  charge  that  stock  with  the  payment  of  a  judgment  recovered 
by  the  plaintifif  against  him  in  the  state  of  New  York  upon  his 
liability  as  a  director  in  a  New  York  corporation,  under  the  stat- 
ute of  New  York  of  1875,  c.  611,  the  material  provisions  of  which 
are  copied  in  the  margin.^    The  bill  alleged  that  on  June  15,  1866, 

*  Sec.  21.  If  any  certificate  or  report  made,  or  public  notice  given, 
by  the  officers  of  any  such  corporation,  shall  be  false  in  any  material 
representation,  all  the  officers  who  shall  have  signed  the  same  shall  be 
jointly  and  severally  liable  for  all  the  debts  of  the  corporation  con- 
tracted while  they  are  officers  thereof. 

Sec.  37.  In  limited  liability  companies,  all  the  stockholders  shall  be 
severally  individually  liable  to  the  creditors  of  the  company  in  which 
they  are  stockholders  to  an  amount  equal  to  the  amount  of  stock  held 
by  them  respectively,  for  all  debts  and  contracts  made  by  such  com- 
pany, until  the  whole  amount  of  capital  stock  fixed  and  limited  by  such 
company  has  been  paid  in,  and  a  certificate  thereof  has  been  made  and 
recorded  as  hereinafter  prescribed.  .  .  .  The  capital  stock  of  every 
such  limited  liability  company  shall  be  paid  in,  one-half  thereof  within 
one  year  and  the  other  half  thereof  within  two  years  from  the  incor- 
poration of  said  company,  or  such  corporation  shall  be  dissolved.  The 
directors  of  every  such  company,  within  thirty  days  after  payment  of 
the  last  instalment  of  the  capital  stock,  shall  make  a  certificate  stating 
the  amount  of  the  capital  so  paid  in,  which  certificate  shall  be  signed 
and  sworn  to  by  the  president  and  a  majority  of  the  directors;  and 
they  shall,  within  the  said  thirty  days,  record  the  same  in  the  office  of 
the  secretary  of  state,  and  of  the  county  in  which  the  principal  business 
office  of  such  corporation  is  situated. 


382  LIABILITY    OF    STOCKHOLDERS. 

the  plaintiff  recovered,  in  the  supreme  court  of  the  state  of  New- 
York,  in  an  action  brought  by  him  against  Attrill  on  March  21, 
1883,  a  judgment  for  the  sum  of  $100,240,  which  had  not  been 
paid,  secured  or  satisfied;  and  that  the  cause  of  action  on  which 
that  judgment  was  recovered  was  as  follows:  On  February  29, 
1880,  the  Rockaway  Beach  Improvement  Company,  limited,  of 
which  Attrill  was  an  incorporator  and  a  director,  became  a  cor- 
poration under  the  law  of  New  York,  with  a  capital  stock  of 
$700,000.  On  June  15,  1880,  the  plaintiff  lent  that  company  the 
sum  of  $100,000,  to  be  repaid  on  demand.  On  February  26,  1880, 
Attrill  was  elected  one  of  the  directors  of  the  company  and  ac- 
cepted the  office,  and  continued  to  act  as  a  director  until  after 
January  29,  1881.  On  June  30,  1880,  Attrill,  as  a  director  of  the 
company,  signed  and  made  oath  to,  and  caused  to  be  recorded, 
as  required  by  the  law  of  New  York,  a  certificate,  which  he  knew 
to  be  false,  stating  that  the  whole  of  the  capital  stock  of  the  cor- 
poration had  been  paid  in,  whereas  in  truth  no  part  had  been  paid 
in,  and  by  making  such  false  certificate  became  liable,  by  the  law 
of  New  York,  for  all  the  debts  of  the  company  contracted  before 
January  29,  1881,  including  its  debt  to  the  plaintiff.  On  March 
8,  1882,  by  proceedings  in  a  court  of  New  York,  the  corporation 
was  declared  to  be  insolvent  and  to  have  been  so  since  July,  1880, 
and  was  dissolved.  A  duly  exemplified  copy  of  the  record  of  that 
judgment  was  annexed  to  and  made  part  of  the  bill. 

The  bill  also  alleged  that  "at  the  time  of  its  dissolution  as 
aforesaid,  the  said  company  was  indebted  to  the  plaintiff  and  to 
other  creditors  to  an  amount  far  in  excess  of  its  assets ;  that  by 
the  law  of  the  state  of  New  York  all  the  stockholders  of  the  com- 
pany were  liable  to  pay  all  its  debts,  each  to  the  amount  of  the 
stock  held  by  him,  and  the  defendant,  Henry  Y.  Attrill,  was  liable 
at  said  date  and  on  April  14,  1882,  as  such  stockholder,  to  the 
amount  of  $340,000,  the  amount  of  stock  held  by  him,  and  was 
on  both  dates  also  severally  and  directly  liable  as  a  director,  hav- 
ing signed  the  false  report  above  mentioned,  for  all  the  debts  of 
said  company  contracted  between  February  26,  1880,  and  January 
29,  1881,  which  debts  aggregate  more  than  the  whole  value  of 
the  property  owned  by  said  Attrill." 

The  bill  further  alleged  that  Attrill  was  in  March,  1882,  and 
had  ever  since  remained  individually  liable  in  a  large  amount  over 
and  above  the  debts  for  which  he  was  liable  as  a  stockholder  and 
director  in  the  company,  and  that  he  was  insolvent,  and  had 
secreted  and  concealed  all  his  property  for  the  purpose  of  de- 
frauding his  creditors. 

The  bill  then  alleged  that  in  April,  1882,  Attrill  acquired  a  large 
amount  of  stock  in  the  Equitable  Gas  Light  Company,  of  Balti- 

Sec.  38.  The  dissolution  for  any  cause  whatever  of  any  corporation 
created  as  aforesaid  shall  not  take  away  or  impair  any  remedy  given 
against  such  corporation,  its  stockholders  or  officers,  for  any  liabilities 
incurred  previous  to  its  dissolution. 


HUNTINGTON    V.    ATTRILL.  3^3 

more,  and  forthwith  transferred  into  his  own  name  as  trustee  for 
his  wife  i,ooo  shares  of  such  stock,  and  as  trustee  for  each  of  his 
three  daughters,  250  shares  of  the  same,  without  valuable  con- 
sideration, and  with  intent  to  delay,  hinder  and  defraud  his  cred- 
itors, and  especially  with  the  intent  to  delay,  hinder  and  defraud 
this  plaintiff  of  his  lawful  suits,  damages,  debts  and  demands 
against  Attrill,  arising  out  of  the  cause  of  action  on  which  the 
aforesaid  judgment  was  recovered,  and  out  of  the  plaintiff's  claim 
against  him  as  a  stockholder;  that  the  plaintiff  in  June,  1880, 
and  ever  since  was  domiciled  and  resident  in  the  state  of  New 
York;  and  that  from  February,  1880,  to  December  6,  1884, 
Attrill  was  domiciled  and  resident  in  that  state ;  ^  and  that  his 
transfers  of  stock  in  the  gas  company  were  made  in  the  city  of 
New  York,  where  the  principal  office  of  the  company  then  was, 
and  where  all  its  transfers  of  stock  were  made;  and  that  those 
transfers  were,  by  the  laws  of  New  York,  as  well  as  by  those  of 
Maryland,  fraudulent  and  void  as  against  the  creditors  of  Attrill, 
including  the  creditors  of  the  Rockaway  Company,  and  were 
fraudulent  and  void  as  against  the  plaintiff. 

The  bill  further,  by  distinct  allegations,  averred  that  those 
transfers,  unless  set  aside  and  annulled  by  a  court  of  equity, 
would  deprive  the  plaintiff  of  all  his  rights  and  interests  of  every 
sort  therein,  to  which  he  was  entitled  as  a  creditor  of  Attrill  at 
the  time  when  those  fraudulent  transfers  were  made;  and  "that 
the  said  fraudulent  transfers  w^ere  wholly  without  legal  considera- 
tion, were  fraudulent  and  void,  and  should  be  set  aside  by  a  court 
of  equity." 

The  bill  prayed  that  the  transfer  of  shares  in  the  gas  company 
be  declared  fraudulent  and  void  and  executed  for  the  purpose  of 
defrauding  the  plaintiff  out  of  his  claim  as  existing  creditor ;  that 
the  certificates  of  those  shares  in  the  name  of  Attrill,  as  trustee, 
be  ordered  to  be  brought  into  court  and  cancelled ;  and  that  the 
shares  "be  decreed  to  be  subject  to  the  claim  of  this  plaintiff  on 
the  judgment  aforesaid,"  and  to  be  sold  by  a  trustee  appointed 
by  the  court  and  new  certificates  issued  by  the  gas  company  to 
the  purchasers,  and  for  further  relief. 

One  of  the  daughters  demurred  to  the  bill  because  it  showed 
that  the  plaintiff's  claim  was  for  the  recovery  of  a  penalty  against 
Attrill  arising  under  a  statute  of  the  state  of  New  York,  and  be- 
cause it  did  not  state  a  case  which  entitled  the  plaintiff  to  any 
relief  in  a  court  of  equity  in  the  state  of  ^Maryland. 

By  a  stipulation  of  counsel,  filed  in  the  cause,  it  was  agreed 
that,  for  the  purpose  of  the  demurrer,  the  bill  should  be  treated 
as  embodying  the  New  York  statute  of  June  31,  1875,  and  that 
the  Rockaway  Beach  Improvement  Company,  limited,  was  in- 
corporated under  the  provisions  of  that  statute. 

The  circuit  court  of  Baltimore  city  overruled  the  demurrer.  On 
appeal  to  the  Court  of  Appeals  of  the  state  of  Maryland  the  order 
was  reversed  and  the  bill  dismissed.     70  Maryland,    191. 


384  LIABILITY   OF    STOCKHOLDERS. 

The  ground  most  prominently  brought  forward  and  most  fully 
discussed  in  the  opinion  of  the  majority  of  the  court,  delivered  by 
Judge  Bryan,  was  that  the  liability  imposed  by  section  21  of  the 
statute  of  New  York  upon  officers  of  a  corporation  making  a  false 
certificate  of  its  condition  was  for  all  its  debts,  without  inquiring 
whether  a  creditor  had  been  deceived  and  induced  by  deception  to 
lend  his  money  or  to  give  credit,  or  whether  he  had  incurred  loss 
to  any  extent  by  the  inability  of  the  corporation  to  pay,  and 
without  limiting  the  recovery  to  the  amount  of  loss  sustained, 
and  was  intended  as  a  punishment  for  doing  of  any  of  the  forbid- 
den acts,  and  was,  therefore,  in  view  of  the  decisions  in  that  state 
and  in  Maryland,  a  penalty  which  could  not  be  enforced  in  the 
state  of  Maryland;  and  that  the  judgment  obtained  in  New  York 
for  this  penalty,  while  it  "merged  the  original  cause  of  action  so 
that  a  suit  cannot  be  again  maintained  upon  it,"  and  "is  also 
conclusive  evidence  of  its  existence  in  the  form  and  under  the  cir- 
cumstances stated  in  the  pleadings,"  yet  did  not  change  the 
nature  of  the  transaction,  but,  within  the  decision  of  this  court 
in  Wisconsin  v.  Pelican  Ins.  Co.,  127  U.  S.  265,  was  in  it  "essen- 
tial nature  and  real  foundation"  the  same  as  the  original  cause 
of  action,  and  therefore,  a  suit  could  not  be  maintained  upon  such 
a  judgment  beyond  the  limits  of  the  state  in  which  it  was  ren- 
dered,    pp.   193-198. 

The  court  then  took  up  the  clause  of  the  bill  above  quoted,  in 
which  it  was  sought  to  charge  Attrill  as  originally  liable  under 
the  statute  of  New  York,  both  as  a  stockholder  and  as  a  director; 
and  observing  that  "this  liability  is  asserted  to  exist  independently 
of  the  judgment,"  summarily  disposed  of  it,  upon  the  grounds 
that  it  could  not  attach  to  him  as  a  stockholder,  because  he  had 
not  been  sued,  as  required  by  the  New  York  statute,  within  two 
years  after  the  plaintiff's  debt  became  due ;  nor  as  a  director, 
because  "the  judgment  against  Attrill  for  having  made  the  false 
report  certainly  merges  all  right  of  action  against  him  on  this 
account ;"  but  that,  if  he  was  liable  at  the  time  and  on  the 
grounds  "mentioned  in  this  clause  of  the  bill,"  this  liability  was 
barred  by  the  statute  of  limitations   of  Maryland,  pp.   198,    199. 

Having  thus  decided  against  the  plaintiff's  claim  under  his 
judgment  upon  the  single  ground  that  it  was  for  a  penalty  under 
the  statute  of  New  York,  and,  therefore,  could  not  be  enforced  in 
Maryland,  and  against  any  original  liability  under  the  statute, 
for  various  reasons,  the  opinion  concluded :  "Upon  the  whole,  it 
appears  to  us  that  the  complainant  has  no  cause  of  action,  which 
he  can  maintain  in  this  state."     p.  199. 

Judge  Stone,  with  whom  Judge  McSherry  concurred,  dissented 
from  the  opinion  of  the  court,  upon  the  ground  that  it  did  not 
give  due  effect  to  the  act  of  congress,  passed  in  pursuance  of  the 
Constitution  of  the  United  States,  and  providing  that  the  records 
of  judgments  rendered  by  a  court  of  any  State  shall  have  such 
faith  and  credit  given  to  them  in  every  court  within  the  United 


HUNTINGTON    V.    ATTRILL.  385 

States  as  tliey  have  by  law  or  usage  in  the  courts  of  the  State 
whence  they  are  taken.  Act  of  May  26,  1790,  c.  11,  i  Stat.  122; 
Rev.  Stat.  §  905.  He  began  his  opinion  by  saying:  "I  look  upon 
the  principal  point  as  a  Federal  question,  and  am  governed  in  my 
views  more  by  my  understanding  of  the  decisions  of  the  Supreme 
Court  of  the  United  States  than  by  the  decisions  of  the  state 
courts."  And  he  concluded  thus:  "I  think  the  Supreme  Court, 
in  127  U.  S.,  meant  to  confine  the  operation  of  the  rule  that  no 
country  will  execute  the  penal  laws  of  another  to  such  laws  as 
are  properly  classed  as  criminal.  It  is  not  very  easy  to  give  any 
brief  definition  of  a  criminal  law.  It  may,  perhaps,  be  enough  to 
say  that,  in  general,  all  breaches  of  duty  that  confer  no  rights 
upon  an  individual  or  person,  and  which  the  State  alone  can  take 
cognizance  of,  are  in  their  nature  criminal,  and  that  all  such  come 
within  the  rule.  But  laws  which,  while  imposing  a  duty,  at  the 
same  time  confer  a  right  upon  the  citizen  to  claim  damages  for 
its  nonperformance,  are  not  criminal.  If  all  the  laws  of  the  lat- 
ter description  are  held  penal  in  the  sense  of  criminal,  that  clause 
in  the  Constitution  which  relates  to  records  and  judgments  is  of 
comparatively  little  value.  There  is  a  large  and  constantly  in- 
creasing number  of  cases  that  may  in  one  sense  be  termed  penal, 
but  can  in  no  sense  be  classed  as  criminal.  Examples  of  these 
may  be  found  in  suits  for  damages  for  negligence  in  causing 
death,  for  double  damages  for  the  injury  to  stock  where  railroads 
have  neglected  the  state  laws  for  fencing  in  their  tracks,  and  the 
liability  of  officers  of  corporations  for  the  debts  of  the  company, 
by  reason  of  their  neglect  of  a  plain  duty  imposed  by  statute. 
I  cannot  think  that  judgments  on  such  claims  are  not  within  the 
protection  given  by  the  Constitution  of  the  United  States.  I, 
therefore,  think  the  order  in  this  case  should  be  affirmed."  pp. 
200-205. 

A  writ  of  error  was  sued  out  by  the  plaintiff  and  allowed  by  the 
Chief  Justice  of  the  Court  of  Appeals  of  Maryland  upon  the 
ground  "that  the  said  Court  of  Appeals  is  the  highest  court  of 
law  or  equity  in  the  State  of  Maryland  in  which  a  decision  in  the 
said  suit  could  be  had;  that  in  said  suit  a  right  and  privilege  are 
claimed  under  the  Constitution  and  statutes  of  the  United  States, 
and  the  decision  is  against  the  right  and  privilege  set  up  and 
claimed  by  your  petitioner  under  said  Constitution  and  statutes ; 
and  that  in  said  suit  there  is  drawn  in  question  the  validity  of  a 
statute  of  and  an  authority  exercised  under  the  United  States,  and 
the  decision  is  against  the  validity  of  such  statute  and  of  such 
authority." 

It  thus  appears  that  the  judgment  recovered  in  Xew  York  was 
made  the  foremost  ground  of  the  bill,  was  fully  discussed  and  dis- 
tinctly passed  upon  by  the  majority  of  the  Court  of  Appeals  of 
Maryland,  and  was  the  only  subject  of  the  dissenting  opinion; 
and  that  the  court,  without  considering  whether  the  validity  of 
the  transfers  impeached  as  fraudulent  was  to  be  governed  by  the 

25 — Priv.\te  Corp. 


386  LIABILITY    OF    STOCKHOLDERS. 

law  of  New  York  or  by  the  law  of  Maryland,  and  without  a  sug- 
gestion that  those  transfers,  alleged  to  have  been  made  by  Attrill 
with  intent  to  delay,  hinder  and  defraud  all  his  creditors,  were 
not  voidable  by  subsequent,  as  well  as  by  existing  creditors,  or 
that  they  could  not  be  avoided  by  the  plaintiff  claiming  under  the 
judgment  recovered  by  him  against  Attrill  after  those  transfers 
were  made,  declined  to  maintain  his  right  to  do  so  by  virtue  of 
that  judgment,  simply  because  the  judgment  had,  as  the  court 
held,  been  recovered  in  another  State  in  an  action  for  a  penalty. 

The  question  whether  due  faith  and  credit  were  thereby  denied 
to  the  judgment  rendered  in  another  State  is  a  Federal  question, 
of  which  this  court  has  jurisdiction  on  this  writ  of  error.  Green 
v.  Van  Buskirk,  5  Wall.  307,  311;  Crapo  v.  Kelly,  16  Wall.  610, 
619;  Dupasseur  v.  Rochereau,  21  Wall.  130,  134;  Crescent  City 
Co.  V.  Butchers'  Union,  120  U.  S.  141,  146,  147;  Cole  v.  Cun- 
ningham, 133  U.  S.  107;  Carpenter  v.  Strange,  141  U.  S.  87,  103. 

In  order  to  determine  this  question  it  will  be  necessary,  in  the 
first  place,  to  consider  the  true  scope  and  meaning  of  the  funda- 
mental maxim  of  international  law,  stated  by  Chief  Justice  Mar- 
shall in  the  fewest  possible  words :  "The  courts  of  no  country 
execute  the  penal  laws  of  another."  The  Antelope,  10  Wheaton, 
66,  123.  In  interpreting  this  maxim  there  is  danger  of  being 
mislead  by  the  different  shades  of  meaning  allowed  to  the  word 
"penal"  in  our  language. 

In  the  municipal  law  of  England  and  America  the  words 
"penal"  and  "penalty"  have  been  used  in  various  senses.  Strictly 
and  primarily  they  denote  punishment,  whether  corporal  or 
pecuniary,  imposed  and  enforced  by  the  state  for  a  crime  or 
offense  against  its  laws.  United  States  v.  Reisinger,  128  U.  S. 
398,  402;  United  States  v.  Chouteau,  102  U.  S.  603,  611.  But 
they  are  also  commonly  used  as  including  any  extraordinary  lia- 
bility to  which  the  law  subjects  a  wrongdoer  in  favor  of  the  per- 
son wronged,  not  limited  to  the  damages  suffered.  They  are  so 
elastic  in  meaning  as  even  to  be  familiarly  applied  to  cases  of  pri- 
vate contracts,  wholly  independent  of  statutes,  as  when  we  speak 
of  the  "penal  sum."  or  "penalty"  of  a  bond.  In  the  words  of 
Chief  Justice  Marshall :  "In  general,  a  sum  of  money  in  gross,  to 
be  paid  for  the  nonperformance  of  an  agreement,  is  considered 
as  a  penalty,  the  legal  operation  of  which  is  to  cover  the  damages 
which  the  party  in  whose  favor  the  stipulation  is  made  may  have 
sustained  from  the  breach  of  contract  by  the  opposite  party." 
Taylor  v.  Sandiford,  7  Wheat.  13,  17. 

Penal  laws,  strictly  and  properly,  are  those  imposing  punish- 
ment for  an  offense  committed  against  the  state,  and  which,  by 
the  English  and  American  constitutions,  the  executive  of  the  state 
has  the  power  to  pardon.  Statutes  giving  a  private  action 
against  the  wrongdoer  are  sometimes  spoken  of  as  penal  in  their 
nature,  but  in  such  cases  it  has  been  pointed  out  that  neither  the 
liability  imposed  nor  the  remedy  given  is  strictly  penal. 


HUNTINGTON    V.    ATTRILL.  387 


The  provision  of  the  statute  of  New  York,  now  in  question, 
making  the  officers  of  a  corporation  who  sign  and  record  a  false 
certificate  of  the  amount  of  its  capital  stock,  liable  for  all  its  debts 
is  in  no  sense  a  criminal  or  quasi  criminal  law.  The  statute, 
while  it  enables  persons  complying  with  its  provisions  to  do  busi- 
ness as  a  corporation,  without  being  subject  to  the  liability  of 
general  partners,  takes  pains  to  secure  and  maintain  a  proper 
corporate  fund  for  the  payment  of  the  corporate  debts.  With  this 
aim  it  makes  the  stockholders  individually  liable  for  the  debts  of 
the  corporation  until  the  capital  stock  is  paid  in  and  a  certificate 
of  the  payment  made  by  the  officers,  and  makes  the  officers  liable 
for  any  false  and  material  representation  in  that  certificate.  The 
individual  liability  of  the  stockholders  takes  the  place  of  a  cor- 
porate fund  until  that  fund  has  been  duly  created,  and  the  indi- 
vidual liability  of  the  officers  takes  the  place  of  the  fund  in  case 
their  statement  that  it  has  been  duly  created  is  false.  If  the  offi- 
cers do  not  truly  state  and  record  the  facts  which  exempt  them 
from  liability  they  are  made  liable  directly  to  every  creditor  of 
the  company,  who  by  reason  of  their  wrongful  acts  has  not  the 
security  for  the  payment  of  his  debt  out  of  the  corporate  property, 
on  which  he  had  a  right  to  rely.  As  the  statute  imposes  a  bur- 
densome liability  on  the  officers  for  their  wrongful  act,  it  may 
well  be  considered  penal,  in  the  sense  that  it  should  be  strictly 
construed.  But  as  it  gives  a  civil  remedy,  at  the  private  suit  of 
the  creditor  only,  and  measured  by  the  amount  of  his  debt,  it  is  as 
to  him  clearly  remedial.  To  maintain  such  a  suit  is  not  to  admin- 
ister a  punishment  imposed  upon  an  oflFender  against  the  State, 
but  simply  to  enforce  a  private  right  secured  under  its  laws  to  an 
individual.  We  can  see  no  just  ground,  on  principle,  for  holding 
such  a  statute  to  be  a  penal  law,  in  the  sense  that  it  can  not  be 
enforced  in  a  foreign  state  or  country. 

The  decisions  of  a  Court  of  Appeals  of  New  York,  so  far  as 

they  have  been  brought  to  our  notice,   fall  short  of  holding  that 

the  liability  imposed  upon  the  officers  of  the  corporation  bv  such 

statutes  is  a  punishment  or  penalty  which  cannot  be  enforced  in 

another  State. 

******         ******* 

It  is  true  that  the  courts  of  some  States,  including  Maryland, 
have  declined  to  enforce  a  similar  liability  imposed  by  the  statute 
of  another  State.  But  in  each  of  these  cases  it  appears  to  have 
been  assumed  to  be  a  sufficient  ground  for  that  conclusion,  that 
the  liability  was  not  founded  in  contract,  but  was  in  the  nature 
of  a  penalty  imposed  by  statute,  and  no  reasons  were  given  for 
considering  the  statute  a  penal  law  in  the  strict,  primary  and 
international  sense.  Derrickson  v.  Smith.  3  Dutcher  (27  N.  I. 
Law),  166;  Halsey  v.  McLean.  12  Allen.  438;  First  National 
Bank  v.  Price,  33  ^Maryland.  487. 

It  is  also  true  that  in  Steam  Engine  Co.  v.  Hubbard,  loi  U.  S. 


388  LIABILITY    OF    STOCKHOLDERS. 

188,  192,  Mr.  Justice  Clifford  referred  to  those  cases  by  way  of 
argument.  But  in  that  case,  as  well  as  in  Chase  v.  Curtis,  113 
U.  S.  452,  the  only  point  adjudged  was  that  such  statutes  were  so 
far  penal  that  they  must  be  construed  strictly,  and  in  both  cases 
jurisdiction  was  assumed  by  the  Circuit  Court  of  the  United 
States,  and  not  doubted  by  this  court,  which  could  hardly^  have 
been  if  the  statute  had  been  deemed  penal  within  the  maxim  of 
international  law.  In  Flash  v.  Conn.,  109  U.  S.  371,  the  liability 
sought  to  be  enforced  under  the  statute  of  New  York  was  the 
liability  of  a  stockholder  arising  upon  contract,  and  no  question 
was  presented  as  to  the  nature  of  the  liability  of  officers.^ 

But  in  Hornor  v.  Henning,  93  U.  S.  228,  this  court  declined  to 
consider  a  similar  liability  of  officers  of  a  corporation  in  the  Dis- 
trict of  Columbia  as  a  penalty.  See  also  Neal  v.  Moultrie,  12 
Georgia,  104;  Cady  v.  Sandford,  53  Vermont,  632,  639,  640; 
Nickerson  v.  Wheeler,  118  Mass.  295,  298;  Post  v.  Toledo,  etc., 
Railroad,  144  Mass.  341,  345;  Wolverton  v.  Taylor,  132  Illinois, 
197;  Morawetz  on  Corporations   (2d  ed.),   §  908. 

In  this  view  that  the  question  is  not  one  of  local,  but  of  inter- 
national law,  we  fully  concur.  The  test  is  not  by  what  name  the 
statute  is  called  by  the  legislature  or  the  courts  of  the  States  in 
which  it  is  passed,  but  whether  it  appears  to  the  tribunal  which 
is  called  upon  to  enforce  it  to  be,  in  its  essential  character  and 
effect  a  punishment  of  an  offense  against  the  public,  or  a  grant  of 
a  civil  right  to  a  private  person. 

In  this  country  the  question  of  international  law  must  be  deter- 
mined in  the  first  instance  by  the  court,  state  or  national,  in 
which  the  suit  is  brought.  If  the  suit  is  brought  in  a  Circuit 
Court  of  the  United  States  it  is  one  of  those  questions  of  general 
jurisprudence  which  that  court  must  decide  for  itself,  uncontrolled 
by  local  decisions.  Burgess  v.  Seligman,  107  U.  S.  20,  33.  Texas 
&  Pacific  Railway  v.  Cox,  145  U.  S.  593,  605,  above  cited.  If  a 
suit  on  the  original  liability  under  the  statute  of  one  State  is 
brought  in  a  court  of  another  State,  the  Constitution  and  laws  of 
the  United  States  have  not  authorized  its  decision  upon  such  a 
question  to  be  reviewed  by  this  court.  New  York  Ins.  Co.  v. 
Hendren,  92  U.  S.  286;  Roth  v.  Ehman,  107  U.  S.  319.  But  if 
the  original  liability  has  passed  into  judgment  in  one  State,  the 
courts  of  another  State,  when  asked  to  enforce  it,  are  bound  by 
the  Constitution  and  laws  of  the  United  States  to  give  full  faith 
and  credit  to  that  judgment,  and  if  they  do  not,  their  decision,  as 
said  at  the  outset  of  this  opinion,  may  be  reviewed  and  reversed 
by  this  court  on  writ  of  error. 

The  essential  nature  and  real  foundation  of  a  cause  of  action, 
indeed,  are  not  changed  by  recovering  judgment  upon  it.  This 
was  directly  adjudged  in  Wisconsin  v.  Pelican  Ins.  Co.,  above 
cited.  The  difference  is  only  in  the  appellate  jurisdiction  of  this 
court  in  the  one  case  or  in  the  other. 


HUNTINGTON    V.    ATTRILL.  389 

If  a  suit  to  enforce  a  judgment  rendered  in  one  State,  and 
which  has  not  changed  the  essential  nature  of  the  HabiHty,  is 
brought  in  the  courts  of  another  State,  this  court,  in  order  to 
determine,  on  writ  of  error,  whether  the  highest  court  of  the  latter 
State  has  given  full  faith  and  credit  to  the  judgment,  must  deter- 
mine for  itself  whether  the  original  cause  of  action  is  penal  in 
the  international  sense.  The  case,  in  this  regard,  is  analogous  to 
one  arising  under  the  clause  of  the  Constitution  which  forbids  a 
State  to  pass  any  law  impairing  the  obligation  of  contracts,  in 
which,  if  the  highest  court  of  a  State  decides  nothing  but  the 
original  construction  and  obligation  of  a  contract,  this  court  has 
no  jurisdiction  to  review  its  decision,  but  if  the  state  court  gives 
effect  to  a  subsequent  law,  which  is  impugned  as  impairing  the 
obligation  of  a  contract,  this  court  has  power,  in  order  to  deter- 
mine whether  any  contract  has  been  impaired,  to  decide  for  itself 
what  the  true  construction  of  the  contract  is.  New  Orleans 
Waterworks  v.  Louisiana  Sugar  Co.,  125  U.  S.  18,  38.  So  if 
the  state  court,  in  an  action  to  enforce  the  original  liability  under 
the  law  of  another  State,  passes  upon  the  nature  of  that  liability 
and  nothing  else,  this  court  cannot  review  its  decision;  but  if  the 
state  court  declines  to  give  full  faith  and  credit  to  a  judgment  of 
another  State,  because  of  its  opinion  as  to  the  nature  of  the  cause 
of  action  on  which  the  judgment  was  recovered,  this  court,  in 
determining  whether  full  faith  and  credit  have  been  given  to  that 
judgment,  must  decide  for  itself  the  nature  of  the  original  liability. 

Whether  the  Court  of  Appeals  of  Maryland  gave  full  faith  and 
credit  to  the  judgment  recovered  by  this  plaintiff  in  New  York 
depends  upon  the  true  construction  of  the  provision  of  the  Con- 
stitution and  of  the  act  of  Congress  upon  that  subject. 

The  provision  of  the  Constitution  is  as  follows :  "Full  faith 
and  credit  shall  be  given  in  each  State  to  the  public  acts,  records 
and  judicial  proceedings  of  every  other  State.  ^  And  the  Congress 
may,  by  general  laws,  prescribe  the  manner  in  which  such  acts, 
records  and  proceedings  shall  be  proved  and  the  effect  thereof." 
Art.  4,  sec.  i. 

This  clause  of  the  Constitution,  like  the  less  perfect  provision 
on  the  subject  in  the  articles  of  Confederation,  as  observed  by 
Mr.  Justice  Story,  "was  intended  to  give  the  same  conclusive  ef- 
fect to  judgments  of  all  the  States,  so  as  to  promote  uniformity, 
as  well  as  certainty,  in  the  rule  among  them,"  and  had  three  dis- 
tinct objects:  First,  to  declare,  and  by  its  own  force  establish, 
that  full  faith  and  credit  should  be  given  to  the  judgments  of 
every  other  State;  second,  to  authorize  Congress  to  prescribe  the 
manner  of  authenticating  them;  and  third,  to  authorize  Congress 
to  prescribe  their  effect  when  so  authenticated.  Story  on  the 
Constitution,  §^   1307,   1308. 

Congress,  in  the  exercise  of  the  power  so  conferred,  besides 
prescribing  the  manner  in  whicli  the  records  and  judicial  proceed- 
ings  of  any   State  may  be  authenticated,   has   defined   the   effect 


290  LIABILITY    OF    STOCKHOLDERS. 

thereof  by  enacting  that  "the  said  records  and  judicial  proceed- 
ings so  authenticated  shall  have  such  faith  and  credit  given  to 
them  in  every  court  within  the  United  States  as  they  have  by 
law  or  usage  in  the  courts  of  the  State  from  which  they  are 
taken."  Rev.  Stat.  §  905,  re-enacting  Act  of  May  26,  1790,  c. 
II,   I   Stat.   122.     *     *     * 

The  judgment  rendered  by  a  court  of  the  State  of  New  York, 
now  in  question  is  not  impugned  for  any  want  of  jurisdiction  in 
that  court.  The  statute  under  which  that  judgment  was  recov- 
ered was  not,  for  the  reasons  already  stated  at  length,  a  penal 
law  in  the  international  sense.  The  faith  and  credit,  force  and 
effect,  which  that  judgment  had  by  law  and  usage  in  New  York, 
was  to  be  conclusive  evidence  of  a  direct  civil  liability  from  the 
individual  defendant  to  the  individual  plaintiff  for  a  certain  sum 
of  money  and  a  debt  of  record,  on  which  an  action  would  lie,  as 
on  any  other  civil  judgment  inter  partes.  The  Court  of  Appeals 
of  Maryland,  therefore,  in  deciding  this  case  against  the  plaintiff 
upon  the  ground  that  the  judgment  was  not  one  which  it  was 
bound  in  any  manner  to  enforce,  denied  to  the  judgment  the  full 
faith,  credit  and  effect  to  which  it  was  entitled  under  the  Con- 
stitution and  laws  of  the  United  States. 


CHAPTER  XVIII. 

INSOLVENCY    AND    DISSOLUTION. 

BOSTON  GLASS  MANUFACTORY  v.  LANGDON. 

1834.     24  Pick.   (Mass.)   49,  35  Am.  Dec.  292. 

Methods  of  Dissolution. 

Assumpsit  on  a  promissory  note  given  by  the  defendant  to  the 
plaintiffs.  The  defendant  pleads  in  abatement,  that  at  the  time  of 
the  purchase  of  the  writ  there  was  not,  and  now  is  not,  any  such 
corporation  established  by  law,  called  the  Boston  Glass  Manufac- 
tory, as  in  and  by  the  writ  is  supposed.  The  plaintiffs  reply  that 
there  was  and  is  such  a  corporation;  and  tender  an  issue;  which 
is  joined. 

At  the  trial,  before  Morton,  J.,  the  plaintiffs  offered  in  evidence 
their  act  of  incorporation,  and  showed  their  organization  under  it 
in  1811. 

The  records  of  the  corporation  were  introduced  by  the  plain- 
tiffs, and  were  used  and  relied  upon  by  both  parties. 

The  defendant  then  introduced  an  indenture,  dated  the  27th  of 
May,  1827,  assigning  all  the  property  of  the  corporation  to  certain 
persons,  in  trust  to  pay,  pro  rata,  such  creditors  as  should  become 
parties  to  the  indenture.  This  instrument  contained  covenants, 
that  the  assignees  might  use  the  name  of  the  corporation  in  the 
collection  of  the  debts,  and  in  the  disposition  of  the  property  as- 
signed; that  the  corporation  would  not  hinder  or  obstruct  them  in 
the  performance  of  these  functions;  and  that  it  would  make  any 
further  conveyances  and  assurances  which  might  become  neces- 
sary, and  perform  any  other  and  further  acts  which  might  be  re- 
quired to  enable  the  assignees  fully  to  execute  their  trust.  No 
provision  was  made  for  a  release  to  the  corporation  by  the  cred- 
itors, nor  for  paying  over  to  the  corporation  the  surplus,  if  any, 
of  the  property  assigned.  The  defendant  also  referred  to  all  the 
records  subsequent  to  1817.  and  contended  that_  the  assignment  of 
the  property  of  the  corporation,  and  the  omission  to  hold  annual 
meetings,  to  choose  directors,  and  to  transact  business,  as  appears 
by  the  records  and  books  of  the  corporation,  supported  the  issue 
on  her  part  and  entitled  her  to  a  verdict. 

But  the  jury  were  instructed,  that  the  evidence  was  competent 
to  prove  the  establishment  and  continuance  of  the  corporation 
down  to  the  present  time. 

The  plaintiffs  then  claimed  to  have  the  damages  assessed  by  the 
jury,  if  they   found  a  verdict  in  their  favor,  and  offered  in  evi- 

391 


392  INSOLVENCY    AND   DISSOLUTION. 

dence  the  note  declared  on.  This  was  objected  to  by  the  defend- 
ant, because  the  note  had  been  assigned.  But  the  objection  was 
overruled. 

The  defendant  then  offered  to  prove  that  the  note  was  without 
consideration.     This  evidence  was  objected  to  and  was  excluded. 

The  jury  found  a  verdict  for  the  plaintiffs  for  the  whole  amount 
of  the  note  and  interest. 

The  defendant  excepted  to  the  decisions  and  instructions  of  the 
judge;  and  for  the  reasons  above  appearing,  moved  for  a  new 
trial. 

MORTON,  J.,  delivered  the  opinion  of  the  court.  The  non- 
existence or  death  of  the  plaintiff  may  properly  be  pleaded  in 
abatement,  i  Chitty's  PI.  482 ;  Story's  PI.  24.  But  whether,  as 
it  entirely  and  perpetually  destroys  the  plaintiff's  right  to  recover, 
it  may  not  also  be  pleaded  in  bar,  it  is  not  necessary  to  determine. 
Proprietors  of  Alonumoi  v.  Rogers,  i  Mass.  R.  159;  First  Parish 
in  Sutton  v.  Cole,  3  Pick.  245.  Whether  the  plea  conclude  in 
abatement  or  bar,  the  issue  being  found  against  the  defendant, 
the  judgment  must  be  peremptory.  The  established  rule  is,  that 
in  dilatory  pleas,  when  the  issue  is  found  against  the  defendant 
on  matters  of  fact,  the  judgment  must  be  in  chief.  Gould's  PL 
300;  Howe's  Pract.  215. 

The  principal  question  for  our  consideration  is,  whether  judg- 
ment shall  be  rendered  on  the  verdict.  The  defendant's  counsel 
contends  that  the  evidence  introduced  will  not  support  the  verdict, 
but  that  the  verdict  is  against  the  evidence  and  the  law  and  should 
be  set  aside. 

The  point  which  has  been  determined  by  the  jury,  though  nec- 
essary to  be  submitted  to  them  with  proper  instructions,  is  quite 
as  much  a  matter  of  law  as  of  fact;  and  we  the  more  readily 
enter  into  the  examination  of  it. 

The  legal  establishment  and  due  organization  of  the  corpora- 
tion were  admitted ;  but  it  was  contended  that  the  facts  disclosed 
showed  a  dissolution  of  it. 

The  elementary  treatises  on  corporations  describe  four  methods 
in  which  they  may  be  dissolved.  It  is  said  that  private  corpora- 
tions may  lose  their  legal  existence  by  the  act  of  the  legislature ; 
by  the  death  of  all  the  members ;  by  a  forfeiture  of  their  fran- 
chises ;  and  by  a  surrender  of  their  charters :  2  Kyd  on  Corp.  447 ; 
I  Bl.  Comm.  485;  2  Kent's  Comm.  (ist  ed.)  245;  Angell  &  Ames 
on  Corp.  501 ;  Oakes  v.  Hill,  14  Pick.  442.  No  other  mode  of 
dissolution  is  anywhere  mentioned  or  alluded  to. 

I.  In  England,  where  the  parliament  is  said  to  be  omnipotent 
and  where  in  fact  there  is  no  constitutional  restraint  upon  their 
action,  but  their  own  discretion  and  sense  of  right,  corporations 
are  supposed  to  hold  their  franchises  at  the  will  of  the  legislature. 
But  if  they  possess  the  power  to  annul  charters,  it  certainly  has 
been  rarely  exercised  by  them.     In  this  country,  where  the  legis- 


BOSTON    GLASS    MANUFACTORY    V.    LANGDON.  393 

lative  power  is  carefully  defined  by  explicit  fundamental  laws,  by 
which  it  must  be  governed  and  beyond  which  it  cannot  go,  it 
has  become  a  question  of  some  difficulty  to  determine  the  precise 
extent  of  their  authority  in  relation  to  the  revocation  of  charters 
granted  by  them.  But  as  it  is  not  pretended  that  there  has  been 
any  legislative  repeal  of  the  plaintifif's  charter,  it  will  not  be  use- 
ful further  to  discuss  this  branch  of  the  subject. 

2.  As  all  the  original  stockholders  are  not  deceased,  the  cor- 
poration cannot  be  dissolved  for  the  want  of  members  to  sustain 
and  exercise  the  corporate  powers.  Besides,  this  mode  of  disso- 
lution cannot  apply  to  pecuniary  or  business  corporations.  The 
shares,  being  property,  pass  by  assignment,  bequest,  or  descent, 
and  must  ever  remain  the  property  of  some  persons,  who  of 
necessity  must  be  members  of  the  corporation  as  long  as  it  may 
exist. 

3.  Although  a  corporation  may  forfeit  its  charter  by  an  abuse 
or  misuser  of  its  powers  and  franchises,  yet  this  can  only  take 
effect  upon  a  judgment  of  a  competent  tribunal.  2  Kent's  Comm. 
(ist  ed.)  249;  Corporation  of  Colchester  v.  Seaber,  3  Burr.  1866; 
Smith's  Case,  4  ]\Iod.  53.  Whatever  neglect  of  duty  or  abuse  of 
power  the  corporation  may  have  been  guilty  of,  it  is  perfectly 
clear  that  they  have  not  lost  their  charter  by  forfeiture.  Until  a 
judicial  decree  to  this  effect  be  passed,  they  will  continue  their 
corporate  existence.     The  King  v.  Amery,  2  T.  R.  515. 

4.  Charters  are  in  many  respects  compacts  between  the  gov- 
ernment and  the  corporators.  And  as  the  former  cannot  deprive 
the  latter  of  their  franchises  in  violation  of  the  compact,  so  the 
latter  cannot  put  an  end  to  the  compact  without  the  consent  of 
the  former.  It  is  equally  obligatory  on  both  parties.  The  sur- 
render of  a  charter  can  only  be  made  by  some  formal  solemn  act 
of  the  corporation ;  and  will  be  of  no  avail  until  accepted  by  the 
government.  There  must  be  the  same  agreement  of  the  parties 
to  dissolve,  that  there  was  to  form  the  compact.  It  is  the  ac- 
ceptance which  gives  efficacy  to  the  surrender.  The  dissolution  of 
a  corporation,  it  is  said,  extinguishes  all  its  debts.  The  power  of 
dissolving  itself  by  its  own  act,  would  be  a  dangerous  power, 
and  one  which  cannot  be  supposed  to  exist. 

But  there  is  nothing  in  this  case  which  shows  an  intention  of 
the  corporators  to  surrender  or  forfeit  their  charter,  nor  anything 
which  can  be  construed  into  a  surrender  or  forfeiture. 

The  possession  of  property  is  not  essential  to  the  existence  of  a 
corporation.  2  Kent's  Comm.  (ist  ed.)  249.  Its  insolvency  can- 
not, therefore,  extinguish  its  legal  existence.  Nor  can  the  assign- 
ment of  all  its  property  to  pay  its  debts,  or  for  any  other  purpose, 
have  that  effect.  The  instrument  of  assignment  was  not  so  in- 
tended, and  cannot  be  so  construed.  All  its  provisions  look  to 
the  continuance  of  the  corporation.  It  contains  covenants  that 
the  assignees  may  use  the  corporate  name  for  the  collection  of 
the  debts  and  the  disposition  of  the  property  assigned;  that  the 


394  INSOLVENCY    AND   DISSOLUTION. 

corporation  will  not  hinder  or  obstruct  them  in  the  performance 
of  these  functions;  that  it  will  make  any  further  conveyances  and 
assurances  which  may  become  necessary,  and  will  do  and  perform 
any  other  and  further  acts  which  may  be  required  to  enable  the 
assignees  fully  to  execute  their  trust.  The  instrument  which 
covenants  for  future  acts,  cannot  be  construed  to  take  away  all 
power  of  action. 

The  omission  to  choose  directors  clearly  does  not  show  a  disso- 
lution of  the  corporation.  Although  the  proper  officers  may  be 
necessary  to  enable  the  body  to  act,  yet  they  are  not  essential  to 
its  vitality.  Even  the  want  of  officers  and  the  want  of  power  to 
elect  them,  would  not  be  fatal  to  its  existence.  It  has  a  poten- 
tiality which  might,  by  proper  authority,  be  called  into  action, 
without  affecting  the  identity  of  the  corporate  body.  Colchester 
V.  Seaber,  3  Burr.  1870. 

But  here,  in  fact,  was  no  lack  of  officers.  Although  no  direct- 
ors had  been  chosen  for  several  years,  yet,  by  the  by-laws  of  the 
corporations,  the  directors,  though  chosen  for  one  year,  were  to 
continue  in  office  till  others  were  chosen  in  their  stead. 

The  damages  were  properly  assessed  by  the  jury.  The  defend- 
ant having  elected  to  try  her  case  upon  a  plea  in  abatement,  must 
submit  to  the  legal  consequences  of  that  form  of  trial.  Perhaps 
the  court  might  have  assessed  the  damages  as  in  case  of  default. 
But  most  obviously  the  better  course  was  to  submit  the  subject 
to  a  jury.  In  doing  this  the  defendant  could  not  be  allowed  to 
go  into  the  whole  defense  as  upon  the  general  issue.  The  rule 
adopted  at  the  trial  was  the  correct  one. 

Judgment  according  to  verdict.^ 


TOMLINSON  V.  BRICKLAYERS'  UNION. 

1882.     87  Ind.  308. 

Forfeiture  of  Charter. 

HOWK,  J.:  The  only  question  presented  for  decision  by  the 
record  of  this  cause  and  the  error  assigned  thereon  is  this:  Does 
the  complaint  of  the  appellants,  the  plaintiffs  below,  state  facts 
sufficient  to  constitute  a  cause  of  action?     In  their  complaint  the 

*It  is  generally  held  that  a  surrender  must  be  accepted.  Contra, 
Savage  v.  Walshe  (18SS),  26  Ala.  619;  Merchants'  &  Planters'  Line  v. 
Waganer  (1882),  71  Ala.  581.  And  see  State  ex  rel.  Chilhowee  v. 
Woolen  Mills  Co.  (1905),  115  Tenn.  266,  89  S.  W.  741,  2  L.  R.  A.  (N.  S.) 
493,  112  Am.  St.  825,  where  a  majority  of  the  stockholders  voted  by 
formal  resolution  to  surrender  the  charter;  there  v^^as  no  acceptance,  but 
it  was  held  that  the  surrender  was  sufficient  to  justify  a  suit  under  a 
section  of  the  Tennessee  code  providing  for  a  dissolution  by  judicial 
decree  in  case  of  the  surrender  of  corporate  rights. 

As  to  the  effect  of  the  death  of  all  the  members,  see  State  v.  Trustees 
of  Vincennes  University  (1854),  5  Ind.  77;  McGinty  v.  Athol  Reservoir 


TOMLINSON    V.    BRICKLAYERS     UNION.  395 

appellants  alleged,  in  substance,  that  on  or  about  the  28th  day 
of  August,  1867,  they  and  others  formed  a  voluntary  association, 
known  as  and  named  "The  Bricklayers'  Union  of  Indianapolis ;" 
that  the  objects  of  the  association  were  to  unite  all  practical 
bricklayers,  so  as  to  secure  concert  of  action  in  whatever  tended 
to  their  interests,  and  to  afford  pecuniary  aid  to  the  members 
thereof,  when  disabled  from  sickness,  accident  or  misfortune; 
that  immediately  upon  the  organization  of  the  association  a  code 
of  by-laws  and  constitution  were  adopted,  fixing  the  amount  of 
dues,  fines  and  assessments  payable  by  each  member  of  the  asso- 
ciation; that  from  1867  to  April,  1879,  some  five  hundred  or 
more  members  joined  the  association,  among  whom  were  the  ap- 
pellants, and  each  and  all  paid  their  money  in  dues,  fines  and 
assessments,  which  money  was  placed  in  one  general  fund,  until, 
in  April,  1879,  the  same  amounted  to  the  sum  of  about  eight 
thousand  dollars,  belonging  to  said  members  as  a  joint  and  gen- 
eral fund  for  the  benefit  of  each  and  all  of  them;  that  after  the 
association  had  been  duly  incorporated  the  appellants  and  many 
others,  for  whose  benefit  the  appellants  sued,  to  the  number  of 
five  hundred,  made  and  adopted  the  by-laws  and  constitution 
governing  the  association;  that  since  such  organization,  and  be- 
fore, the  appellants,  each  and  all,  and  about  four  hundred  others, 
whose  names  could  not  be  given,  because  they  were  in  books  of 
which  the  appellee  had  control,  contributed  different  amounts,  and 
the  same  were  under  the  control  of  the  association,  in  trust  for 
the  appellants  and  the  other  members  of  the  association,  in  which 
they  all  had  a  general  interest;  that  the  association  continued  until 
about  April,  1879,  when  a  few  of  its  members,  twenty  in  num- 
ber, without  the  knowledge,  consent  or  approval,  or  the  legal  right 
so  to  do,  unlawfully,  wrongfully  and  secretly  abandoned  and 
pretended  to  dissolve  the  said  corporation,  and  pretended  to  form 
a  new  association,  to  be  known  as  "The  Bricklayers'  Union  No.  i, 
of  Indiana,"  the  appellee,  and  as  soon  as  the  pretended  new 
organization  was  formed  they  secretly,  unlawfully  and  wrongfully 
converted  the  said  fund  of  the  appellants  and  other  members  of 
the  old  association  to  the  use  of  the  appellee,  and  the  same  was 
then  in  their  or  its  possession ;  and  the  appellee,  although  often 
requested,  refused  to  pay  the  same  to  the  appellants  and  the 
other  members  of  the  old  association,  and  refused  to  allow  the 
appellants  and  other  members  of  the  first  organization  to  partici- 
pate in  the  new  organization,  and  refused  them  all  rights  of  prop- 
erty therein,  and  claimed  that  the  appellants  and  those  for  whom 
they  sued  were  not  members  thereof,  and  claimed  the  said  fund 
as  their  own,  and  refused  the  appellants  any  and  all  benefits  there- 
Co.  (1892),  155  Mass.  183,  29  N.  E.  510:  Harris  v.  Mississippi  Valley  &c. 
R.  Co.  (1875),  51  Miss.  602,  esp.  p.  610;  riiilips  v.  Wickham  (1829),  1 
Paige  Ch.  (N.  Y.)  590  (loss  of  an  integral  part  of  the  corporation); 
Lehigh  Bridge  Co.  v.  Lehigh  Coal  &  Navigation  Co.  (1833),  4  Rawie 
(19  Pa.)  9  (suspension  distinguished  from  extinction  of  franchise). — Ed. 


396  INSOLVENCY    AND    DISSOLUTION. 

from;  that  at  the  time  of  said  conversion  and  pretended  dissolu- 
tion, and  the  formation  of  the  pretended  new  organization,  the 
appellants  and  many  others,  for  whom  they  sued,  were  members 
in  good  standing  of  the  old  association;  and  that  the  defendants 
had  also  unlawfully  converted  all  the  lodge  furniture  and  personal 
property,  of  the  value  of  three  hundred  dollars,  without  right  and 
wrongfully  to  their  own  use,  and  then  had  possession  thereof. 

The  appellants  further  alleged  that  the  appellee  had  forfeited  its 
charter  and  corporate  right  by  refusing  to  allow  them  to  partici- 
pate in  the  new  organization ;  and  in  this,  that  less  than  a  quorum 
had  pretended  to  transact  business ;  and  in  this,  that  its  president 
had  allowed  money  to  be  drawn  contrary  to  its  constitution ;  and 
in  this,  that  the  recording  secretary  had  failed  to  keep  a  correct 
record  of  the  transactions  of  each  meeting,  and  to  make  a  quar- 
terly report  of  such  transactions,  and  to  deliver  to  his  successors 
the  books,  records  and  property  of  the  appellee ;  and  in  this,  that 
its  financial  secretary  had  failed  to  discharge  his  duties  and  been 
allowed  to  continue  in  office ;  and  in  this,  that  its  members  were 
allowed  to  remain  in  good  standing  without  paying  dues,  etc. ; 
and  in  this,  that  its  treasurer  had  failed  to  discharge  his  duties ; 
and  in  this,  that  its  trustees  had  converted  the  above  described 
property  of  the  old  association  to  the  exclusive  use  of  appellee ; 
and  in  this,  that  it  had  used  the  money  for  other  and  different 
purposes  than  that  specified  in  its  constitution ;  and  in  dissolving 
the  union  contrary  to  the  terms  of  its  constitution.  Wherefore, 
etc. 

We  are  of  the  opinion  that  the  appellee's  demurrer,  for  the  want 
of  facts,  was  correctly  sustained  to  the  appellant's  complaint. 
Conceding  all  the  facts  stated  in  the  complaint  to  be  true  as 
alleged,  they  constitute  no  cause  of  action  in  favor  of  the  appel- 
lants and  against  the  appellee.  It  will  be  seen  that  the  wrong 
conversion  of  the  money  and  property  of  the  first  corporation  is 
alleged  to  have  been  committed  by  its  twenty  seceding  members, 
who  were  not  made  parties  to  this  action.  The  complaint  fails 
to  show  the  appellee's  liability  for  this  wrongful  conversion  to 
the  plaintiff's  in  this  action.  It  is  not  alleged  that  the  old  cor- 
poration was  dissolved  in  any  legal  manner,  and  it  cannot  be 
said,  we  think,  that  the  secession  of  twenty  members  would  or 
ought  to  work  the  dissolution  of  a  corporation  having  five  hun- 
dred members.  If  the  old  corporation  is  still  a  legal  entity,  and 
it  must  be  presumed  to  be  such,  at  least  until  the  contrary  is 
shown,  the  right  of  action  for  the  wrongful  conversion  of  its 
money  and  property  would  be  in  such  old  corporation,  and  not 
in  any  of  its  members,  however  numerous  they  were,  for  the 
money  and  property  of  a  corporation  belong  to  it,  and  not  to  its 
individual  members.  It  follows,  therefore,  that  the  complaint 
does  not  state  a  cause  of  action  in  favor  of  the  appellants  for  the 
wrongful  conversion  of  the  money  and  property  described  therein. 

It  seems  to  us,  also,  that  the  allegations  of  the  complaint  in  re- 


STATE  V.    MINNESOTA  THRESHER   MFG.   CO.  397 

lation  to  the  forfeiture  of  appellee's  charter  do  not  constitute  a 
cause  of  action  in  favor  of  the  appellants.  If  it  were  true  that 
the  appellee  and  its  officers  and  members  had  violated  every  sec- 
tion of  its  by-laws  and  constitution,  it  is  certain,  we  think,  that 
such  violation  would  not  give  the  appellants  any  right  of  action 
or  legal  cause  of  complaint  against  the  appellee,  for  it  was  not 
shown  that  the  appellants  were  members  of  the  appellee  cor- 
poration. 

We  have  found  no  error  in  the  record.     The  judgment  is  af- 
firmed, with  costs. 


STATE  V.   MINNESOTA  THRESHER  MANUFACTURING 

CO. 

1889.     40  Minn.  213,  41   N.  W.   1020,  3  L.  R.  A.  510. 

Manufacturing  and  Other  Business — "Franchises"  and  "Powers" 
— Remedy  for  Ultra  Vires  Acts. 

MITCHELL,  J,;  *  *  *  The  corporation  of  Seymour,  Sabin 
&  Co.,  organized  under  Gen.  St.  1878,  title  2,  c.  34,  had  been 
engaged  for  some  years  in  the  business  of  manufacturing,  lum- 
bering, and  merchandising.  In  May,  1882,  the  Northwestern 
Manufacturing  &  Car  Company  was  organized  as  a  manufactur- 
ing corporation,  under  Laws  1873,  Gen.  St.  1878,  Ch.  34,  §§  120. 
143,  with  a  professed  paid-up  capital  stock  of  about  $4,500,000, 
viz.,  about  $3,000,000  preferred  stock,  and  $1,500,000  common 
stock.  It  was  organized  with  a  view  of  buying  out  and  continuing 
the  manufacturing  business  of  Seymour,  Sabin  &  Co.  Upon  its 
organization  it  purchased  the  manufacturing  plant  and  the  assets 
of  that  company,  of  the  alleged  value  of  $2,617,000,  including 
over  $1,250,000  of  bills  receivable,  commonly  known  as  "machine 
notes,"  and  a  large  amount  of  "undivided  profits"  and  "contracts." 
w^hatever  that  may  mean.  For  these  assets  the  car  company 
issued  and  paid  to  Seymour,  Sabin  &  Co.  $2,617,000  of  its  pre- 
ferred stock,  and  $1,500,000  of  its  common  stock,  the  latter  as 
"bonus."  The  car  company  thereupon  engaged  in  the  manufac- 
turing business,  while  Seymour,  Sabin  &  Co.  continued  the  busi- 
ness of  lumbering  and  merchandising.  The  latter  proceeded  to 
divide  up  among  its  own  stockholders  the  stock  of  the  car  com- 
pany, thus  received,  in  exchange  for  its  own  stock,  which  was 
delivered  up  and  cancelled,  on  the  basis  of  two  dollars  of  the 
former  for  one  of  the  latter.  The  two  companies  continued  in 
business  about  two  years,  during  which  they  seem  to  have  been 
in  the  habit  of  indorsing  each  other's  paper  for  large  amounts; 
at  least,  the  car  company  indorsed  that  of  Seymour,  Sabin  &  Co. 
to  the  amount  of  $500,000,  which  was  outstanding  when  both 
companies  failed.     During  these  two  years  the  car  company  paid 


398  INSOLVENCY   AND   DISSOLUTION. 

$360,000  in  dividends  to  its  preferred  stockholders,  no  part  of 
which,  as  respondent  alleges,  was  ever  earned. 

In  May,  1884,  both  companies  being  insolvent,  their  affairs 
were  put  into  the  hands  of  receivers — the  debts  of  Seymour, 
Sabin  &  Co.  being  over  $2,000,000,  and  its  assets  realizing  at 
receiver's  sale  only  $45,000,  or  about  two  cents  on  the  dollar  of 
its  indebtedness;  and  the  debts  of  the  car  company  being  about 
$3,400,000,  and  its  assets,  which  were  of  a  very  miscellaneous 
character,  estimated  at  $4,372,000,  but  realizing  at  receiver's 
sale,  two  years  afterwards,  only  $1,150,000,  which,  after  deduct- 
ing expenses  and  several  hundred  thousand  dollars  liabilities  con- 
tracted by  the  receiver,  left  only  about  $225,000,  or  from  10  to 
15  cents  on  the  dollar  for  the  creditors,  and  nothing,  of  course, 
for  the  stockholders.  In  November,  1884,  some  of  the  stock- 
holders and  creditors  of  the  car  company,  with  the  view  of  saving 
something  out  of  the  wreck,  organized  the  respondent,  the  Min- 
nesota Thresher  Manufacturing  Company,  with  an  authorized 
capital  of  $7,000,000,  viz.,  $4,000,000  preferred  stock,  and  $3,000,- 
000  common  stock,  on  the  following  plan,  to-wit:  paid-up  pre- 
ferred stock  to  be  issued  in  exchange  for  claims  against  the  car 
company  at  par,  and  paid-up  common  stock,  in  exchange  for 
preferred  stock  of  the  car  company,  dollar  for  dollar.  All  of 
the  stock  of  respondent  has  been  issued  on  this  plan;  and  in- 
cluded in  the  claims  against  the  car  company,  for  which  re- 
spondent stock  has  been  thus  issued,  are  the  indorsements  of  the 
car  company  upon  the  paper  of  Seymour,  Sabin  &  Co.,  already 
referred  to.  The  respondent  has  thus  issued  about  $1,700,000  of 
its  preferred  stock,  and  $2,000,000  of  its  common  stock,  and 
thus  become  the  owner  of  claims  against  the  car  company  to  the 
former  amount,  and  of  its  stock  to  the  latter  amount.  Down  to 
April,  1887,  the  respondent  alleges  that  it  supposed  that  the 
assets  of  the  car  company  would  realize  enough  to  pay  its  debts 
in  full,  and  leave  some  surplus  for  its  preferred  stockholders;  but 
since  that  date  the  respondent  seems  to  have  continued  to  issue 
its  stock  on  the  same  basis  or  plan  as  before,  except  that  those 
who  exchange  their  preferred  stock  in  the  car  company  for  the 
common  stock  of  respondent  are  required  to  place  the  latter  in 
the  hands  of  certain  trustees,  to  hold  and  vote  for  the  term  of 
five  years.  Common  and  preferred  stock  have  the  same  voting 
power. 

In  1887  the  court  ordered  the  receiver  to  sell  en  masse  the 
entire  assets  of  the  car  company,  consisting  of  stock  on  hand, 
accounts,  bills  receivable  to  the  amount  of  over  $1,500,000,  claims 
against  Seymour,  Sabin  &  Co.  to  a  large  amount,  and  some  stock 
in  two  other  insolvent  corporations.  The  respondent  purchased 
the  whole  of  these  assets  for  $1,150,000,  and,  in  order  to  raise 
the  amount  of  cash  necessary  to  be  paid  on  the  purchase  ($500,- 
000),  devised  a  scheme  by  which  it  executed  a  mortgage  or  trust 
deed  for  $1,600,000  on  the  entire'  property  purchased,  under  which 


STATE  V.    MINNESOTA  THRESHER   MFG.   CO.  399 

it  issued  and  sold  its  bonds  to  the  amount  of  $1,173,000  to  its 
preferred  stockholders  for  50  cents  on  the  dollar,  cash;  they  at 
the  same  time  surrendering  for  cancellation  and  retirement  one 
dollar  of  their  stock  for  every  two  dollars  of  bonds  purchased. 
After  obtaining  possession  of  the  property  thus  purchased  at  the 
receiver's  sale,  which  it  alleges  was  worth  more  than  double  what 
it  paid  for  it,  the  respondent  engaged  in  the  manufacturing  of 
machinery  at  Stillwater,  which  it  is  still  carrying  on  quite  exten- 
sively, having,  as  it  alleges,  sold  articles  of  its  own  manufacture 
since  it  commenced  business  of  the  value  of  $1,100,000.  As  pur- 
chaser and  owner  of  the  large  claims  already  referred  to  against 
Seymour,  Sabin  &  Co.  and  the  car  company,  the  respondent  has 
commenced,  or  is  about  to  commence,  the  following  suits :  First, 
against  the  stockholders  of  Seymour,  Sabin  &  Co.,  who  exchanged 
their  stock  for  that  of  the  car  company,  it  being  claimed  that  such 
exchange  was  illegal,  and  in  fraud  of  creditors;  second,  against 
the  holders  of  the  common  stock  of  the  car  company,  on  the 
ground  that  they  have  never  paid  for  the  same;  third,  against  the 
preferred  stockholders  of  the  car  company,  to  recover  back  the 
dividends  received  by  them,  on  the  ground  that  they  were  never 
earned. 

The  articles  of  association  of  respondent  (Ex.  F.)  state  that 
the  organization  is  formed  "pursuant  to,  and  in  conformity  with, 
an  act  of  the  legislature  of  the  state  of  Minnesota  entitled  'An 
act  relating  to  manufacturing  corporations,'  approved  March  7, 
1873,  and  the  several  acts  of  the  legislature  amendatory  there- 
of." Gen.  St.  1878,  c.  34,  §§  120-143.  The  articles  state  that 
"the  objects  for  which  the  association  is  formed  are  the  pur- 
chase of  the  capital  stock,  evidences  of  indebtedness  issued  by  it, 
and  the  assets  of  the  Northwestern  Manufacturing  &  Car  Com- 
pany, a  corporation  existing  under  the  laws  of  the  state  of  Min- 
nesota, or  any  portion  of  said  capital  stock,  evidence  of  indebted- 
ness or  assets,  and  the  manufacture  and  sale  of  steam  engines  of 
all  kinds,  farm  implements  and  machinery  of  all  kinds,  and  the 
manufacture  and  sale  of  all  articles,  implements,  and  machinery 
of  which  wood  and  iron,  or  either  of  them,  form  the  principal 
component  parts,  and  the  manufacture  of  the  materials  therein 
used."  These  articles  contain  everything  required  by  title  2,  c.  34, 
except  a  statement  of  the  highest  amount  of  indebtedness  to 
which  the  corporation  should  at  any  time  be  subject.  The  articles 
were  also  published  and  filed  as  required  by  that  title.  The 
directors  also  prepared  a  certificate  in  the  form  reciuircd  by  sec- 
tion 9  of  the  act  of  1873  (Gen.  St.  1878,  c.  34.  §  128).  in  case 
of  manufacturing  corporations,  but  (as  we  construe  the  allegations 
of  the  answer)   it  was  never  filed. 

Much  of  this  history  is  perhaps  irrelevant  to  any  questions 
involved  in  these  proceedings,  but  it  will  serve  to  convey  a  toler- 
ably clear  idea  of  the  situation  of  things  as  presented  by  the 
record.     The  relator  by  his  information  stands  admitting  the  cor- 


400  INSOLVENCY    AND   DISSOLUTION. 

porate  existence  of  the  respondent,  but  claims  upon  the  facts 
four  grounds  of  forfeiture  of  its  franchises  for  misuser,  Viz. : 
First,  doing  business  without  filing  a  certificate,  as  required  by 
section  9  of  the  act  of  1873;  second,  dealing  in  negotiable  paper, 
and  in  the  stock  and  indebtedness  of  other  and  insolvent  corpora- 
tions, and  issuing  its  stock  therefor ;  third,  purchasing  and  retiring 
its  own  stock,  to  the  prejudice  of  its  creditors  and  stockholders ; 
fourth,  using  its  franchises  and  powers  as  an  instrumentality  of 
fraud  and  oppression,  in  bringing-  a  large  number  of  suits  against 
the  stockholders  of  Seymour,  Sabin  Sr  Co.,  and  the  car  company 
upon  the  claims  referred  to.  This  last  is  but  a  make-weight,  and 
is  not  urged  upon  the  argument.  Taken  by  itself,  there  is  noth- 
ing in  it,  for,  if  respondent  had  the  power  to  purchase  these 
claims,  it  has  an  undoubted  right  to  bring  suits  on  them  to  test 
the  question  of  the,  personal  liability  of  the  stockholders  of  these 
defunct  corporations. 

The  determination  of  the  case  will  require  the  consideration  of 
two  leading  questions :  First,  what  kind  of  a  corporation  is  the 
respondent?  and,  second,  what  is  the  office  of  an  information  in 
the  nature  of  quo  warranto,  and  what  will  constitute  a  misuser 
of  corporate  franchises  such  as  to  warrant  a  judgment  of  ouster 
in  such  proceedings?     *     *     * 

While  it  is  not  necessary  here  to  go  at  length  into  the  subject, 
yet  it  is  proper  in  this  connection  to  consider  briefly  the  second 
principal  question  referred  to  at  the  outset,  viz.,  the  office  of  an 
information  in  the  nature  of  quo  warranto,  and  what  will  amount 
to  such  a  misuser  of  corporate  franchises  as  to  justify  a  judg- 
ment of  forfeiture  in  such  proceedings.  And  right  here  it  is 
important  to  keep  in  mind  certain  distinctions  which  it  seems  to 
us  counsel  for  relator  have  overlooked.  And,  first,  these  special 
proceedings  upon  information  must  not  be  confounded  with  a 
civil  action,  under  Gen.  St.  1878,  chapter  79.  Although,  in  a 
general  sense,  the  two  may  be  termed  "concurrent  remedies,"  yet 
it  is  undoubtedly  true  that  the  office  or  function  of  the  latter  has 
been  enlarged  somewhat  beyond  that  of  a  common-law  quo  war- 
ranto information.  In  some  jurisdictions,  as  formerly  with  us 
the  civil  action  is  the  only  remedy.  But  while,  quo  warranto 
having  been  revived  in  this  state,  we  have  now  the  two  remedies, 
yet  the  office  of  the  writ  of  quo  warranto  ought  not  to  be  ex- 
tended beyond  what  it  was  at  common  law.  The  remedy  by  civil 
action  is  more  in  accordance  with  the  ordinary  mode  of  judicial 
procedure  in  determining  property  rights,  and  ought  to  be  pur- 
sued except  in  those  special  or  exceptional  cases  where  the  public 
interests  seem  to  demand  a  more  speedy  or  summary  mode  of 
procedure  than  by  action  in  the  district  court.  The  common  law 
quo  warranto  information,  as  we  have  it  today,  is  substantially 
as  left  by  the  changes  and  modifications  made  by  the  statute  of 
9  Anne,  c.  20.  The  scope  of  the  remedy  furnished  by  it  is  to 
forfeit  the  franchises  of  a  corporation   for  misuser  or  non-user. 


STATE  V.    MINNESOTA  THRESHER   MFG.   CO.  4OI 

It  is  therefore  necessary,  in  order  to  secure  a  judicial  forfeiture 
of  respondent's  charter,  to  show  a  misuser  of  its  franchises 
justifying  such  a  forfeiture;  and,  as  already  remarked,  the  object 
being  to  protect  the  public,  and  not  to  redress  private  grievances, 
the  misuser  must  be  such  as  to  work  or  threaten  a  substantial 
injury  to  the  public,  or  such  as  to  amount  to  a  violation  of  the 
fundamental  condition  of  the  contract  by  which  the  franchise  was 
granted,  and  thus  defeat  the  purpose  of  the  grant;  and  ordinarily 
the  wrong  or  evil  must  be  one  remediable  in  no  other  form  of 
judicial  proceeding. 

Courts  always  proceed  with  great  caution  in  declaring  a  for- 
feiture of  franchises,  and  require  the  prosecutor  seeking  the  for- 
feiture to  bring  the  case  clearly  within  the  rules  of  law  entitling 
him  to  exact  so  severe  a  penalty.  It  is  also  necessary  to  notice 
the  distinction,  frequently  overlooked,  between  franchises  and 
powers.  The  definition  of  a  "franchise"  given  by  Finch,  adopted 
by  Blackstone,  and  accepted  by  every  authority  since,  is  "a  royal 
privilege  or  branch  of  the  king's  prerogative,  subsisting  in  the 
hands  of  a  subject."  To  be  a  franchise,  the  right  possessed  must 
be  such  as  cannot  be  exercised  without  the  express  permission  of 
the  sovereign  power — a  privilege  or  immunity  of  a  public  nature 
which  cannot  be  legally  exercised  without  legislative  grant.  It 
follows  that  the  right,  whether  existing  in  a  natural  or  artificial 
person,  to  carry  on  any  particular  business,  is  not  necessarily  or 
usually  a  franchise.  The  kinds  of  business  which  corporations 
organized  either  under  title  2,  c.  34,  or  under  the  act  of  1873,  are 
authorized  to  carry  on,  are  powers,  but  not  franchises,  because 
it  is  a  right  possessed  by  all  citizens  who  choose  to  engage  in  it 
without  any  legislative  grant.  The  only  franchise  which  such 
corporations  possess  is  the  general  franchise  to  be  or  exist  as  a 
corporate  entity.  Hence,  if  they  engage  in  any  business  not  au- 
thorized by  the  statute,  it  is  ultra  vires,  or  in  excess  of  their 
powers,  but  not  a  usurpation  of  franchises  not  granted,  nor  nec- 
essarily a  misuser  of  those  granted.  Acts  in  excess  of  power  may 
undoubtedly  be  carried  so  far  as  to  amount  to  a  misuser  of  the 
franchise  to  be  a  corporation  and  a  ground  for  its  forfeiture. 
How  far  it  must  go  to  amount  to  this  the  courts  have  wisely 
never  attempted  to  define,  except  in  very  general  terms,  preferring 
the  safer  course  of  adopting  a  gradual  process  of  judicial  inclu- 
sion and  exclusion  as  the  cases  arise.  But  we  think  it  may  be 
safely  stated  as  the  general  consensus  of  the  authorities  that,  to 
constitute  a  misuser  of  the  corporate  franchise,  such  as  to  war- 
rant its  forfeiture,  the  ultra  vires  acts  must  be  so  substantial  and 
continued  as  to  amount  to  a  clear  violation  of  the  condition  upon 
which  the  franchise  was  granted,  and  so  derange  or  destroy  the 
business  of  the  corporation  that  it  no  longer  fulfills  the  end  for 
which  it  was  created.  But.  in  case  of  excess  of  powers,  it  is  only 
where  some  public  mischief  is  done  or  threatened  that  the  state, 
by  the  attorney  general,  should  interfere.    If,  as  between  the  com- 

26 — Private  Corp. 


402  INSOLVENCY    AND    DISSOLUTION. 

pany  and  its  stockholders,  there  is  a  wrongful  application  of  the 
capital,  or  an  illegal  incurring  of  liabilities,  it  is  for  the  stock- 
holders to  complain.  If  the  company  is  entering  into  contracts 
ultra  vires,  to  the  prejudice  of  persons  outside  the  corporation, 
such  as  creditors,  it  is  for  such  persons  to  take  steps  to  protect 
their  interests.  The  mere  fact  that  acts  are  ultra  vires  is  not 
necessarily  a  ground  for  interference  by  the  state,  especially  by 
quo  warranto,  to  forfeit  the  corporate  franchises.  It  should  also 
be  borne  in  mind  that  acts  ultra  vires  may  justify  interference 
on  part  of  the  state  by  injunction  to  prohibit  a  continuance  of  the 
excess  of  powers  which  would  not  be  sufficient  ground  for  a  for- 
feiture in  proceedings  in  quo  warranto,  and  hence  many  of  the 
numerous  authorities  cited  by  relator,  being  of  that  class,  are  not 
entirely  in  point  here. 

Applying  these  principles  to  the  facts  of  this  case,  we  think  the 
state  has  failed  to  make  out  a  case  entitling  it  to  judgment  against 
respondent.    Taking  up,  first,  the  issuing  of  its  stock  for  the  stock 
and  indebtedness  of  the  car  company.     None  of  the  stockholders 
have  any  right  to  complain  of  this.    They  are  all  in  the  same  boat. 
They  got  up  the  company  for  that  express  purpose  and  on  that 
exact  plan.     A  corporation  may  take  property  in  payment  of  its 
stock,  if  it  be  done  bona  fide,  and  with  no  sinister  or  fraudulent 
purpose,  and  there  be  nothing  in  its  charter  or  the  nature  of  its 
business  that  forbids  it.     If  this  stock  and  indebtedness  of  the  car 
company    was    taken    in    payment    of    respondent's    stock   with    a 
fraudulent  purpose,   at   fictitious  values,   in  case  the   corporation 
becomes  insolvent,  creditors  have  their  remedy  against  the  stock- 
holders as  personally  liable  for  stock  not  paid  for.     The  alleged 
unlawful  purchase  and  retirement  of  part  of  its  own  stock  by  the 
respondents  stands  on  the  same  footing.    If  it  is  a  wrong  to  other 
stockholders,  they  have  a  perfect  remedy;  and,  so  far  as  creditors 
are  concerned,  if  the  act  is  illegal,  the  parties  who  surrendered 
the  stock  would  still  be  personally  responsible  as  stockholders  in 
case  of  the  insolvency  of  the  corporation.     It  may  be  that  the 
plan  on  which  this  corporation  is  organized  is  not  in  accordance 
with    the    most    approved    financial    principles,    but    with    these 
financial  matters  we  have  nothing  to  do,  except  so   far  as  they 
may  affect  the  legal  questions  involved ;  and,  upon  the  whole  facts 
of  the  case,  we  do  not  think  that,  under  the  rules  of  law  applica- 
ble, the  state  has  made  out  a  case  entitling  it  to  a  judgment  of 
forfeiture   in   these  proceedings.     It  is   also   a  consideration   not 
without  weight   (although  we  do  not  place  our  decision  upon  it) 
that  the  consequences  of  whatever  mistakes  or  unauthorized  acts 
may  have  been  made  or  done  by  respondent  could  not  now  be 
remedied  by  any  such  judgment.    In  view  of  the  present  condition 
of  respondent's  business,  a  dissolution  of  the  corporation,  and  a 
forced  winding  up  of  its  affairs,  would  involve  new  and  additional 
loss    to   all   parties    concerned,    both    stockholders    and    creditors. 


NEW    YORK    &    LONG   ISLAND    BRIDGE    CO.    V.    SMITH.  4O3 

The  demurrer  to  the  answer  is  therefore  overruled,  and  the  in- 
formation dismissed. 


NEW  YORK  &  LONG  ISLAND   BRIDGE   CO.   v.    SMITH. 

1896.     148  N.  Y.  540,  42  N.  E.  1088. 

When  Forfeiture  Clause  is  Self-Executing. 

BARTLETT,  J. — The  main  question  presented  by  this  appeal 
is  whether  the  New  York  &  Long  Island  Bridge  Company  was, 
at  the  time  this  proceeding  was  instituted,  an  existing  corporation 
duly  authorized  to  acquire  title  to  the  land  of  the  defendant 
Smith,  for  the  purposes  of  constructing  the  bridge  and  its  ap- 
proaches. 

The  learned  counsel  for  the  appellant  rests  his  attack  upon  the 
corporate  existence  on  various  distinct  grounds,  and  a  proper  con- 
sideration of  them  involves  a  full  examination  of  the  legislation 
under  which  the  bridge  company  claims  the  right  to  maintain  this 
proceeding. 

The  appellant  takes  a  preliminary  point  which,  if  sound,  would 
require  a  reversal  of  the  order  appealed  from,  and  a  dismissal  of 
this  proceeding. 

The  act  incorporating  the  bridge  company  (Chap.  395,  Laws  of 
1867),  provides  in  the  twelfth  section  thereof  that  the  bridge  shall 
be  commenced  within  two  years  from  the  passage  of  the  act,  and 
shall  be  continued  without  unreasonable  delay,  until  it  is  com- 
pleted, "or  this  act  and  all  rights  and  privileges  granted  hereby 
shall  be  null  and  void." 

It  is  the  contention  of  appellant's  counsel  that  this  forfeiture 
clause  is  self-executing,  and  as  it  is  admitted  that  the  work  was 
not  commenced  within  two  years  from  the  passage  of  the  act,  the 
bridge  company,  ipso  facto,  ceased  to  exist. 

We  are  referred  to  a  large  number  of  authorities  as  sustaining 
this  position,  and,  among  others,  to  several  cases  in  this  court. 

It  is  observed  that  the  question  as  to  whether  a  forfeiture  clause 
is  or  is  not  self-executing,  depends  wholly  upon  the  language 
employed  by  the  legislature. 

Our  attention  is  called  particularly  to  In  re  Brooklyn.  Winfield 
&  Newton  Ry.  Co.  (72  N.  Y.  245),  and  Brooklyn  Steam  Transit 
Co.  V.  City  of  Brooklyn  (78  N.  Y.  524). 

In  the  first  case  the  words  of  forfeiture  were,  "its  corporate 
existence  and  powers  shall  cease,"  and  this  court  held  that  upon 
default  the  corporation's  existence  and  powers  ceased,  without 
judicial  proceedings.  In  the  second  case  the  words  of  forfeiture 
were,  "this  act  and  all  the  powers,  rights  and  franchises  herein 
and  hereby  granted  shall  be  deemed  forfeited  and  terminated," 
and  this  court  held  the  clause  to  be  self-executing,  thereby  recog- 
nizing the  undoubted  power  of  the  legislature  to  provide  that  cor- 
porate existence  shall  cease  by  the  mere  fact  of  failure  of  the 
corporation  to  perform  certain  acts  imposed  by  the  charter. 


404  INSOLVENCY    AND   DISSOLUTION, 

It  requires,  however,  strong  and  unmistakable  language,  such  as 
each  of  the  cases  referred  to  presents,  to  authorize  the  court  to 
hold  that  it  was  the  intention  of  the  legislature  to  dispense  with 
judicial  proceedings  on  the  intervention  of  the  attorney-general. 

In  the  case  at  bar  the  words  of  forfeiture  are,  "all  rights  and 
privileges  granted  hereby  shall  be  null  and  void." 

It  cannot  be  said  that  the  words  "shall  be  null  and  void"  dis- 
close the  legislative  intent  to  make  this  clause  self -executing. 
The  words  "null  and  void,"  as  used  in  this  connection,  clearly 
mean  voidable.  The  word  "void"  is  often  used  in  an  unlimited 
sense,  implying  an  act  of  no  effect,  a  nullity  ab  initio  (Inskeep  v. 
Lecony,  i  N.  J.  L.  112)  ;  in  the  case  at  bar  it  was  not  so  em- 
ployed, but  rather  in  its  more  limited  meaning. 

We  think  these  words  mean  no  more  than  if  the  legislature  had 
said,  in  case  of  default  the  corporation  "shall  be  dissolved."  The 
attorney-general  was  authorized  to  treat  the  charter  of  the  bridge 
company,  as  voidable,  and  by  appropriate  legal  proceedings  to 
have  terminated  its  corporate  existence. 

The  Supreme  Court  of  the  United  States,  in  passing  upon  the 
meaning  of  the  words  "void  and  of  no  effect,"  uses  this  language : 
"But  these  words  are  often  used  in  statutes  and  legal  docu- 
ments, *  *  *  in  the  sense  of  voidable  merely,  that  is,  capable 
of  being  avoided,  and  not  as  meaning  that  the  act  or  transaction 
is  absolutely  a  nullity,  as  if  it  never  had  existed,  incapable  of 
giving  rise  to  any  rights  or  obligations  under  any  circumstances. 
(Ewell  V.  Daggs,  108  U.  S.  148.)" 

Holding,  as  we  do,  that  the  forfeiture  clause  m  the  act  of  1867 
was  not  self-executing,  we  find  in  the  various  acts  amending  the 
act  of  1867  repeated  waivers  by  the  legislature  of  the  failure  of 
the  bridge  company  to  begin  its  work  within  two  years  from  the 
passage  of  the  act  of  1867.     *     *     * 

Order  affirmed,^ 


WILSON  V.  LEARY. 

1897.     120  N.  Car.  90,  26  S.  E.  630,  38  L.  R.  A.  240,  58  Am.  St. 

778. 

Status  of  Corporate  Property  on  Dissolution. 

Civil  action  for  the  recovery  of  land,  tried  before  Robinson,  J., 
at  Fall  Term,  1896,  of  Bertie  Superior  Court,  upon  an  agreed 
statement  of  facts,  a  jury  trial  being  waived.  The  land  in  con- 
troversy was  conveyed  on  the  5th  day  of  July,  1849.  by  Henderson 
Wilson,  the  ancestor  of  plaintiffs,  to  trustees  for  Oriental  Lodge, 
No.  24,  Independent  Order  of  Odd  Fellows,  which  was  incorpora- 
ted under  an  Act  of  the  General  Assembly  of  North  Carolina,  at 

*  Compare  In  re  Brooklyn,  Winfield  etc.  R.  Co.,  75  N.  Y.  335;  In  re 
Kings  County  Elevated  R.  Co.,  105  N.  Y.  97,  13  N.  E.  18,  especially 
119-120.— Ed. 


WILSON    V.    LEARY.  4O5 

its  session  of  1850.  The  conveyance  was  in  fee.  The  trustees 
and  the  Lodge  went  into  possession  and  held  it  until  1872,  when 
the  Lodge  ceased  to  exist,  and  was  never  revived.  Under  the 
direction  of  the  Grand  Lodge  of  Odd  Fellows,  the  land  was  sold 
in  1873,  to  the  defendants.  Previous  to  the  incorporation  of 
Oriental  Lodge  by  the  General  Assembly,  it  had  been  chartered 
by  the  Grand  Lodge  upon  regular  petition,  and  was  one  of  the 
regularly  constituted  and  duly  organized  subordinate  lodges  or 
branches  of  the  order.  It  was  also  agreed  that  the  plaintiffs  had 
never  listed  its  property  for  taxation.  The  action  was  brought 
March  5,  1892,  by  the  plaintiffs,  as  heirs  at  law  of  Henderson 
Wilson,  the  original  grantor,  claiming  that  the  land  reverted  to 
them  upon  the  extinction  of  the  corporation.  His  Honor  gave 
judgment  for  the  plaintiffs,  and  defendants  appealed. 

CLARK,  J.:  The  plaintiffs  must  recover  upon  the  strength  of 
their  own  title,  and  not  upon  defects,  if  any,  in  the  title  of  the 
defendants.  The  conveyance  by  their  ancestor,  Henderson  Wilson, 
was  in  fee  simple  to  trustees  "to  convey  to  Oriental  Lodge,  No. 
24,  I.  O.  O.  F.,  when  the  same  shall  have  been  incorporated  by 
the  Legislature  of  North  Carolina."  It  was  subsequently  incor- 
porated. Though  no  conveyance  by  such  trustees  to  the  lodge  is 
shown,  the  learned  counsel  for  the  plaintiffs  admitted  that  the 
Statute  of  Uses,  27  Henry  VIII,  in  force  in  this  State  by  virtue 
of  our  statute,  executed  the  use  without  the  execution  of  a  deed. 
The  grant  to  the  trustees  being  in  fee  simple,  the  cestui  que  trust 
took  in  fee.  Holmes  v.  Holmes,  86  N.  C.  205.  When  the  lodge 
ceased  to  exist  for  want  of  members,  whether  its  property  passed 
to  the  grand  lodge  of  I.  O.  O.  F.  in  this  State,  of  which  Oriental 
Lodge,  No.  24,  was  a  member,  or  escheated  to  the  State  for  the 
University  (Code,  Sec.  2627),  does  not  concern  the  plaintiffs,  and 
is  not  before  us.  The  title  in  fee  simple  had  passed  out  of  the 
grantor,  and  having  vested  in  the  Oriental  Lodge,  upon  the  ex- 
tinction of  the  latter  as  a  corporate  entity,  its  property,  by  no 
just  construction,  could  return  to  those  whose  ancestors  had  con- 
veyed it  in  fee  upon  receipt  of  the  purchase  money,  which  he  and 
they  have  kept  and  enjoyed. 

The  plaintiff's  counsel  insist,  however,  that,  at  the  time  of  the 
conveyance,  the  Revised  Statutes  (Ch.  26,  Sec.  17),  provided  that 
a  corporation,  unless  otherwise  specially  stated  in  its  charter,  had 
existence  for  only  30  years,  and  as  there  was  no  special  provision 
in  this  charter,  the  grantor  only  parted  with  the  property  for  30 
years  and  held  a  resulting  trust.  But  the  conveyance  was  in  fee, 
and  a  corporation  limited  in  duration  can  take  a  fee  simple  con- 
veyance just  as  a  natural  being,  whose  existence  is  also  limited. 
Either  may  convey  away  the  property,  and  upon  the  death  of 
either,  without  having  disposed  of  it,  the  property  will  go  to  pay 
creditors,  to  heirs,  to  stockholders,  or  as  an  escheat,  according  to 
the  circumstances,  but  in  neither  case  is  there  any  reverter  to  the 


406  INSOLVENCY    AND   DISSOLUTION. 

grantors.  On  the  death  of  a  corporation  the  property  is  usually 
administered  by  a  receiver,  and  on  the  death  of  a  natural  person, 
by  the  personal  representative  or  passes  to  the  heirs. 

By  the  Constitution  of  North  Carolina  (Article  VIII,  Sec.  i), 
all  corporations  (if  chartered  since  1868)  are  subject  to  extinction 
at  any  time,  or  their  duration  can  be  abridged  or  extended,  at  the 
will  of  the  legislature.  It  would  now  be  a  startling  doctrine  that 
upon  the  repeal  of  a  cliarter,  all  real  estate,  though  conveyed  to 
the  corporation  absolutely  in  fee  simple,  reverts  as  at  common 
law  to  the  original  grantors,  to  the  total  exclusion  and  loss  of 
creditors  and  stockholders.  On  the  contrary,  such  property,  when 
not  held  on  a  base  or  qualified  fee,  as  was  the  case  in  State  v. 
Rives,  27  N.  C.  297  (though  it  has  been  since  held  that  there  are 
no  qualified  fees  in  this  State — School  Com.  v.  Kesler,  67  N.  C. 
443),  would  be  administered  to  pay  creditors,  the  surplus  being 
divided  among  the  stockholders.  If  there  were  no  stockholders, 
then  the  question  might  arise  whether  the  property  had  escheated 
to  the  state,  but  certainly  the  grantors,  upon  such  corporation 
becoming  extinct,  would  have  no  greater  right  to  a  reversion  than 
would  the  grantors  to  any  other  corporation.  There  was  no  at- 
tempt to  make  avail  of  the  three  years  and  a  receiver  allowed 
by  the  Code,  sees.  667,  668,  to  wind  up  a  corporation  and  sell  its 
property,  and  hence  no  question  is  raised  whether  they  apply  to 
a  corporation  which  was  chartered  before  they  were  enacted. 

It  is  true,  it  was  held  in  an  opinion  by  Gaston,  J.  (Fox  v. 
Horah,  36  N.  C.  358),  that  by  the  common  law,  upon  the  disso- 
lution of  a  corporation  by  the  expiration  of  its  charter  or  other- 
wise, its  real  property  reverted  to  the  grantor,  its  personal  prop- 
erty escheated  to  the  State,  and  its  choses  in  action  became  extinct, 
and  hence  that,  on  the  expiration  of  the  charter  of  a  bank,  a  court 
of  equity  would  enjoin  the  collection  of  notes  made  payable  to 
the  bank  or  its  cashier,  the  debtor  being  absolved  by  the  dissolu- 
tion. Judge  Thompson  (5  Thomp.  Corp.  §  6720),  refers  to  this 
decision  "in  accordance  with  the  barbarous  rule  of  the  common 
law"  as  "probably  the  last  case  of  its  kind,"  and  notes  that  it  has 
since  been  in  effect  overruled  in  Von  Glahn  v.  De  Rosset,  81  N. 
C.  467,  and  it  is  now  expressly  overruled  by  us.  Chancellor 
Kent  (2  Com.  307,  note),  says,  "This  rule  of  the  common  law 
has,  in  fact,  become  obsolete  and  odious,"  and  elsewhere  he 
stoutly  denied  that  it  had  ever  been  the  rule  of  the  common  law, 
except  as  to  a  restricted  class  of  corporations  (5  Thompson, 
supra.  Sec.  6730).  The  subject  is  thoroughly  discussed  by  Gray 
on  Perpetuities,  Sections  44-51,  and  he  demonstrates  that  my  Lord 
Coke's  doctrines  rested  on  the  dictum  of  a  15th  century  judge 
(Mr.  Justice  Choke,  in  the  Prior  of  Spalding's  Case,  7  Edw.  IV., 
1467),  and  is  contrary  to  the  only  case  deciding  the  point,  John- 
son V.  Norway,  Winch.  37  (1622),  though  Coke's  statement  has 
often  been  referred  to  as  law.  But  whatever  the  extent  of  this 
rule  at  the  common  law,  if  it  was   the  rule  at  all,   it  was   not 


WILSON    V.    LKARY.  4^7 

founded  upon  justice  and  reason,  nor  could  it  be  approved  by 
experience,  and  has  been  repudiated  by  modern  courts.  The  mod- 
ern doctrine  is,  as  held  by  us,  that  "upon  a  dissolution  the  title 
to  real  property  does  not  revert  to  the  original  grantors  or  their 
heirs,  and  the  personal  property  does  not  escheat  to  the  state." 
5  Thompson,  supra,  Sec.  6746;  Owen  v.  Smith,  31  Barb.  641; 
Towar  v.  Hale,  46  Barb.  361.  The  crude  conceptions  of  corpora- 
tions naturally  entertained,  in  a  feudal  and  semi-barbarous  age, 
v^rhen  they  were  few  in  number  and  insignificant  in  value  and 
functions,  by  even  so  able  a  man  as  Sir  Edward  Coke,  and  the 
fanciful  reason  given  by  him  (Coke  Lit.  13b)  for  the  reverter  of 
their  real  estate,  to  wit,  that  a  conveyance  to  them  must  neces- 
sarily be  a  qualified  or  base  fee,  have  long  since  become  outworn 
and  discredited.  That  which  is  termed  "the  common  law"  is  sim- 
ply the  "right  reason  of  the  thing"  in  matters  as  to  which  there  is 
no  statutory  enactment.  When  it  is  misconceived  and  wrongly 
declared,  the  common  rule  is  equally  subject  to  be  overruled, 
whether  it  is  an  ancient  or  a  recent  decision.  Upon  the  facts 
agreed,  judgment  should  be  entered  below  against  the  plaintiffs, 
dismissing  their  action. 
Reversed. 1 

*In  Heath  v.  Barmore  (1872),  50  N.  Y.  302,  Rapallo.  J.,  said:  "In 
so  far  as  the  plaintiflf's  right  to  recover  in  this  action  is  sought  to  be 
sustained,  on  the  ground  that  at  common  law  real  estate  held  by  a 
corporation  at  the  time  of  its  dissolution  reverts  to  the  grantor,  it  can 
not  be  supported  *  *  *  because  the  rule  of  law  invoked  by  the 
plaintiff  does  not  prevail  in  this  state  in  respect  to  stock  corporations. 
Under  the  provisions  of  1  R.  L.,  248,  and  1  R.  S.,  600,  §§  9  and  10,  upon 
the  dissolution  of  a  corporation,  the  directors  or  managers  at  that  time 
become  trustees  of  its  property  (unless  some  other  custodian  is  ap- 
pointed), for  the  purpose  of  paying  the  debts  of  the  corporation  and 
dividing  its  property  among  its  stockholders;  and  these  provisions 
apply  as  well  to  the  real  as  to  the  personal  property  of  corporations. 
*  *  Consequently,  where  lands  are  conveyed  absolutely  to  a  cor- 
poration having  stockholders,  no  reversion  or  possibility  of  a  reverter 
remains  in  the  grantor."  (p.  305.) 

But  see  Mott  v.  Danville  Seminary  (1889),  129  111.  403,  21  N.  E.  927; 
Danville  Seminary  v.  Mott  (1891),  136  111.  289,  28  N.  E.  54  (eleemosy- 
nary corporation);  Titcomb  v.  Kennebunk  Mutual  Fire  Ins.  Co.  (1887), 
79  Me.  315,  9  Atl.  732  (mutual  insurance  company  without  stockholders); 
Mormon  Church  v.  United  States  (1889),  136  U.  S.  1,  34  L.  ed.  481.  10 
Sup.  Ct.  792.  In  the  last  cited  case,  Mr.  Justice  Bradley  said:  "When 
a  business  corporation,  instituted  for  the  purposes  of  gain,  or  private 
interest,  is  dissolved,  the  modern  doctrine  is.  that  its  property,  after 
payment  of  its  debts,  equitably  belongs  to  its  stockholders.  But  this 
doctrine  has  never  been  extended  to  public  or  charitable  corporations. 
As  to  these,  the  ancient  and  established  rule  prevails,  namely:  that 
when  a  corporation  is  dissolved,  its  personal  property,  like  that  of  a 
man  dying  without  heirs,  ceases  to  be  the  subject  of  private  ownership, 
and  becomes  subject  to  the  disposal  of  the  sovereign  authority;  whilst 
its  real  estate  reverts  or  escheats  to  the  grantor  or  donor,  unless  some 
other  course  of  devolution  has  been  directed  by  positive  law,  though 
still  subject  as  we  shall  hereafter  see  to  the  charitable  use.  To  this 
rule  the  corporation  in  question  (the  Church  of  Jesus  Christ  of  Latter- 
Day  Saints)  was  undoubtedly  subject."  (page  47.) — Ed. 


INDEX 


[References  are  to  Pages.] 

ACCEPTANCE— 
of  charter,  33. 
may  decline  to  accept,  34. 
repeal  of  enabling  act  before  acceptance,  23. 
of  surrender  of  charter,  394. 

ACTIONS  AND  EQUITABLE  PROCEEDINGS— 
when  by  stockholder,  281,  289,  295. 
conditions  precedent,  295,  302. 
demand,  288,  289,  300,  301. 
exceptions,  301,  303. 
parties  to  suit,  298,  303. 

to  enforce  statutory  liability,  374,  379,  381. 
effect  of  laches,  294. 
effect  of  acquiescence,  295,  297. 

AGENTS — see  officers  and  agents. 

corporation  must  act  through,  7,  134. 

ARTICLES  OF  INCORPORATION— j^^  incorporation- 
what  they  should  contain,  35. 
•filing,  42. 

ASSIGNMENT — see  transfer  of  shares. 

ATTACHMENT— 
of  stock,  6. 
rights  of  attaching  creditor,  304. 

CAPITAL— .ye^  stock— 
definition,  222. 

distinguished  from  shares,  227,  229. 
distinguished  from  surplus,  230. 
distinguished  from  franchise,  230. 

CERTIFICATE  OF  STOCK— 
definition,  222. 

not  negotiable  instrument,  306,  309,  317. 
as  evidence  of  membership,  258. 

409 


410  INDEX. 

CHARTER— 

definition,  84. 

its  nature,  84,  100. 

as  a  contract,  84,  100,  104,  108,  110. 

construction,  113. 

legislative  control  over,  84,  100,  104,  108. 

subject  to  police  power,  101,  104. 

CITIZENSHIP— 

of  a  corporation,  25,  47. 

for  purposes  of  jurisdiction,  47,  50,  303. 

within  the  meaning  of  constitutional  provisions,  25,  50. 

COLLATERAL  ATTACK— 

on  right  of  de  facto  corporation,  65,  71. 

COMITY  OF  STATES— j^e  foreign  corporations— 
the  doctrine,  195,  205. 

COMMON-LAW     LIABILITY     OF     STOCKHOLDERS— j^e     actions; 

STATUTORY   LIABILITY   OF   STOCKHOLDERS — 

liability  upon  shares  issued  below  par,  356. 
on   shares   issued   at  market  value,  356. 
to  subsequent  creditors  only,  239. 
payment  in  services  or  property,  366. 
as  partners,  68. 
where  no  de  facto  corporation,  71. 

CONSTITUTIONAL  LIMITATIONS— .r^e  charter— 
upon  creation  of  corporations  by  special  act,  33. 

CORPORATE  MEETINGS— .y^^   meetings— 

CORPORATE  POWERS— 
generally,  113,  116,  121. 

powers  incidental  to  corporate  existence,  121. 
perpetual  succession,  1,  5. 
to  have  a  name,  5. 
to  have  a  seal,  120. 

to  purchase,  hold  and  alien  real  estate,  125. 
to  take  by  devise,  167. 
to  take  a  fee  simple,  127,  128. 
to  make  by-laws,  318. 
express  charter  powers,  113,  121. 
construction  of,  113,  116. 
implied  powers,  116,  121,  125. 
acts  within  scope  of  authorized  business,  121. 
to  endorse  commercial  paper,  130. 
to  purchase  stock  in  another  corporation,  140,  143. 
to  purchase  its  own  shares,  135,  137. 
to  give  a  mortgage,  132. 


INDEX.  411 

CORPORATE  POWERS— Continued 
to  loan  money,  46. 
to  borrow  money,  129. 
to  make  negotiable  paper,  130. 
to  make  accommodation  paper,  130. 

CREATION— 

of  corporations,  1,  3,  21,  35. 

by  the  state  only,  35. 

by  legislature,  Zl . 

power  to  create  can  not  be  delegated,  36. 

the  rule  in  England,  Zl . 

minisrterial  duties,  Til ,  38. 

methods  of  legislative  action,  ZZ,  35. 

by  special  or  general  law,  ZZ,  35. 

CRIMES,  LIABILITY  FOR— 188,  191,  194—^^^  torts. 

DE  FACTO  CORPORATIONS— 
definition,  65,  68,  71. 

essential  to  a  de  facto  corporation,  (£,  69. 
capacity  to  be  a  de  jure  corporation,  66. 
good  faith  attempt  to  form  a  corporation,  12. 
user  of  the  right  claimed,  69. 
application  of  doctrine  of  estoppel,  74,  11 . 
estoppel  of  persons  dealing  with  corporation,  82. 

subscriber    to    stock    estopped    to    deny    legal    existence    of    corpora- 
tion, 80. 
powers  of  de  facto  corporation,  79. 

DEFINITION— 

of  a  corporation,  1,  2,  7,  11,  12,  21,  90. 

of  a  private  corporation,  90. 

of  a  public  corporation,  91. 

of  a  quasi  public  corporation,  156. 

of  joint  stock  companies,  23,  28. 

of  de  facto  corporations,  65,  68,  71. 

DIRECTORS— 

relation  to  corporation,  299,  334,  344,  346. 

degree  of  care  required,  344. 

good  faith  required,  352. 

liability  for  negligence  and  misfeasance,  334,  344. 

general  powers,  ZZZ,  334. 

when  may  deal  with  corporation,  325,  352. 

meetings,  318. 

DIRECTORY  PROVISIONS- 
nature  of.  41. 
effect  of  noncompliance  with,  39,  42. 


412  INDEX. 

DISSOLUTION— f^^  INSOLVENCY— 
at  common  law,  392,  393. 
by  legislative   act,   392. 
misuser  of  franchises,  394,  397, 
quo  warranto  proceedings,   10. 
effect  of  insolvency,  393. 
effect  of  failure  to  choose  officers,  394. 
judgment  after  dissolution,  404. 
distribution  of  assets,  404,  407. 
effect  upon  debts,  406,  407. 
effect  upon  corporate  property,  404,  407. 
term  of  existence,  403. 

DIVIDENDS— 

right  to  dividends,  278. 

as  a  debt,  279. 

between   life  tenant   and   remainderman,   280. 

ELECTIONS — sec  meetings. 

ENTITY — see  definition  ;  fiction. 

ESTOPPEL— 

persons  dealing  with  de  facto  corporation,  82. 
in  action  by  de  facto  corporation,  80. 
to  assert  that  contract  is  ultra  vires,  146,  148. 
to  deny  membership,  80. 

EXTRA-TERRITORIAL    POWERS    OF    CORPORATION— .y^g  foreign 

CORPORATIONS. 

FICTION— 

nature  of  a  corporation,  1,  10,  11,  21. 
a  legal  entity,  11. 
disregard  of,  10,  17. 

FOREIGN  CORPORATIONS— 
the  corporate  domicile,  195. 

power  of  corporation  to  act  in  foreign  state,  195,  205,  213,  218. 
power  of  state  over,  209,  210. 
may  be  excluded,  209. 
the  business  of  insurance,  205. 
(the  comity  of  states,  200,  205. 
meaning  of  "doing  business,"  218,  221. 
conditions  which  may  be  imposed,  214,  219. 
when  statute  fixes  a  penalty,  220. 
citizenship,  23. 
under  statutes,  218,  220. 


INDEX.  413 

FORFEITURES— j^^  by-laws— 

of  charter  and  franchises,  394,  397. 
when  clause  is  self-executing,  403,  404. 

FORGED  POWER  OF  ATTORNEY— 
transfer  of  stock  under,  309,  317. 

FRANCHISES— 

definition  of,  401. 

distinguished  from  powers,  2,  23. 

forfeiture  of,  402. 

INCORPORATION— 

by  special  act,  33. 

under  general  laws,  35. 

compliance  with  requirements,  39. 

conditions  precedent  to  legal  incorporation,  39. 

regularity  of  can  not  be  attacked  collaterally,  68. 

directory  provisions,  39. 

INSPECTION  OF  BOOKS  AND  RECORDS— 
the  righits  of  a  stockholder,  264. 
remedy  for  wrongful  refusal,  264. 
effect  of  wrongful  motive,  265,  266. 

JOINT  STOCK  COMPANY— 

distinguished  from  corporation,  23,  27,  28. 

LIABILITY     OF      STOCKHOLDER— .yee     common-law    liability     and 

STATUTORY   LIABILITY. 

MAJORITY— 

powers  of,  302,  324. 

MALICE — see  torts. 

MANAGEMENT  OF  CORPORATIONS— .ftv  officers  and  agents. 

MANDAMUS— 

to  compel  inspection  of  books,  264. 

MANSLAUGHTER— 

corporate  liability  for,  191. 

MANUFACTURING  CORPORATIONS— 
definition,  397. 
nature  of  powers  of,  118. 

MEETINGS— 

corporate  meetings.  318. 
personal  interest  of  voter,  325. 
cumulative  voting,  110,  327. 


414  INDEX. 

MEMBERSHIP,  RIGHTS  OF— 

to  participate  in  managemenit,  318,  325. 
to  vote  at  corporate  meetings,  325,  327. 
to  inspect  books  and  records,  264. 
to  dividends,  278. 
-    to  preference  in  subscription  for  new  shares,  266. 
to  bring  a  representative  suit,  281,  289,  295. 

NAME— 

the  corporate  name,  4. 

NATURE  OF  A  CORPORATION— 
an  artificial  person,  1,  2,  10,  90. 
abandonment  of  the  fiction,  11. 
as  legal  entity,  6,  7,  10. 

NOTICE— 

of  extent  of  corporate  power,  155. 

OFFICERS  AND  AGENTS— .y*'?  directors. 

PARTNERSHIP— 

distinguished  from  corporation,  7,  26. 

PENAL  STATUTES— .y(?e  statutory  liability- 
definition,  386,  387. 
enforcement,  381. 

PERSON— 

corpora>tion  as  a,  43. 
corporation  as  a  respectable,  43. 

POWERS — see  corporate  powers. 

PROMOTERS— 

contracts  of,  51. 

duties,  53. 

as  fiduciaries,  58. 

QUO  WARRANTO— 

to  enforce  forfeiture  of  charter,  10,  400. 

to  prevent  abuse  of  corporate  power,  10,  401. 

REAL  ESTATE— 

power  to  hold,  125,  170. 

at  common  law,  169,  170. 

can  be  questioned  by  state  only,  165,  172. 

acquisition  by  devise,  167. 

statutory  provisions,  172. 

statutes  of  mortmain,  169,  172. 

form  of  grant  to  corporation  at  common  law,  125. 


INDEX.  415 

SEAL— 

of  corporation,  120. 
presumption  where  affixed,  120. 

SET-OFF— 234. 

STATUTORY  LIABILITY  OF  STOCKHOLDERS— .j^^  actions. 

statutory  .in  addition  to  constitutional,  374. 
liability  of  nonresident  stockholders,  374. 
the  remedy  against  nonresidents,  374. 
penal  sitatutes,  381. 
enforcement  of,  379. 
right  of  contribution,  380. 

STOCK— .y^^   SUBSCRIPTIONS   to  capital   stock;    certificate   of   stock. 
what  are  shares  of  stock,  7,  222,  224,  230. 
stock  certificates,  222. 
certificates  not  negotiable  paper,  307. 
shares  of  stock  personal  property,  224. 
the  trust  fund  theory,  234,  Zll . 
meaning  of  the  trust  fund  theory,  234,  239,  ZIZ. 
dividend  stock,  280. 
bonus  stock,  239. 
issued  below  par,  356,  369. 

STOCKHOLDERS— .j<?^   liability   of   stockholders;    membership. 

SUBSCRIPTION  TO  STOCK— 

of  the  form  of  the  contract,  248. 

the  consideration,  248. 

agreement  to  subscribe,  250. 

acceptance  of  offer,  249. 

double  character  of  subscription,  261. 

delivery  of  subscription  to  promoter,  259. 

withdrawal  of  subscription.  248.  249. 

tender  of  certificate  to  subscriber,  258. 

conditional  subscription.  254,  259. 

waiver  of  conditions,  257. 

secret  conditions,  259. 

subscription  of  full  amount  of  capital,  254. 

waiver  of  defense  to  subscription,  257,  258. 

effect  of  change  in  corporate  enterprise  on,  249. 

SUCCESSION,  PERPETUAL— 

property  of  common-law  corporation,   1,  3,   5,   11. 

TITLE  OF  PROPERTY— 

when  one  person  owns  all  the  stock,  6. 


4l6  INDEX. 

TORTS,  LIABILITY  FOR— 

the  former  theory,  175,  176,  177. 
the  modern  rule,  174,  175,  177,  178. 
malice,  179,  180. 
ultra  vires,  182,  186,  187. 
ratification,  185. 

TRANSFER  OF  SHARES— 
of  the  right,  306. 
effect  of  a  transfer,  311. 
transfer  on  books  of  corporation,  304. 
in  breach  of  trust,  306. 
fraudulent  transfer,  306,  309. 
rights  of  purchaser  of  certificates,  306,  309. 
transfer  on  forged  power  of  attorney,  317. 
rights  of  attaching  creditors,  304. 

ULTRA  VIRES  ACTS  OF  CORPORATIONS— 
distinguished  from  illegal  acts,  152. 
the  general  doctrine,  147,  150,  151,  155,  162. 
liability  upon  ultra  vires  torts,  182,  186,  187. 
liability  upon  ultra  vires  contracts,  146,  148,  154,  159. 
when  part  performance,  148,  153,  154,  158. 
when  executory,  146. 
when  benefits  are  retained,  147. 

disaffirmance  after  part  performance,  153,  158,  159,  162. 
notice  of  want  of  power,  155. 
acquisition  of  property,  165,  167. 
acquiescence  in  ultra  vires  acts,  289. 
rescission  of  ultra  vires  contract,   159. 
injunction  to  restrain,  289. 
right  of  stockholders  to,  287,  292. 
laches,  293,  294. 
forfeiture  of  franchise  for,  402. 

VOTERS— 

at  stockholders'  meetings,  323,  325. 

WATERED  STOCK— 

what  constitutes,  366,  368. 


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